1099-Misc - Do I REALLY have to do this?
1099 MISC's (or 1099 for short) are those IRS forms that fly around in January and make life miserable for anyone in, or in close proximity to, an accounting or bookkeeping department.
But, what are these pesky little forms and why do they matter to your firm.
Let's start with the WHY; primarily so you will be motivated to read the rest of this blog and secondarily so you will be motivated to get the forms done.
1. Expenses are deductions and deductions lower tax - that is a good thing.
2. Expenses also need to be supported if they are going to be valid deductions. We love valid deductions because valid deductions lower taxes and that is a good thing.
3. If the expense is for payment of rent or services, it might be necessary to support the expenses by issuing a 1099.
4. Now that nasty stuff. If the IRS decides to audit you and you have, for whatever reason, neglected to issue the 1099, it is possible that they will not let you take those deductions, which results in higher tax - that is not a good thing.
Okay, so we are all on the same page - to get a deduction, issue 1099.
Back to the WHAT. What is a 1099?
- Your company/firm paid to either rent something or to receive a service.
- Your company/firm paid $600 or more in a calendar year (per service provider).
- Your company/firm made the payment to someone or something that is NOT a corporation
That's it, three basic requirements. You need to meet all three or no 1099.
EXCEPTION - Attorneys - for them, it does not matter if they are a corporation or not. If your company paid a lawyer more than $600, issue the 1099.
Now more detail:
What do I mean by person or entity? That means they are a sole proprietor, they are a partnership or they are certain LLC's.
What do I mean by paid rent? If you rent your office space, lease a copier, rent a tent to hold your office party, chances are it will need to issue a 1099.
What do I mean by service? Examples are: graphic design (services), web design (services), software engineering (services), consulting (services), landscape (services), plumbing (services), property management (services), technical writer, transcribing (services), expert witness (services), accounting (services), legal (services), engineering (services). In other words, if you can amend the word and put "services" behind it - it most likely qualifies.
Some more fun facts:
- 1099's are issued to the person you paid by January 31 of the following year (you paid them in 2015, you issue the 1099 in January of 2016). They do that because the person you paid will need to have enough time to
a) get back to you with corrections, if any and
b) complete their tax return on time
- 1099's come in two parts; the part that goes to the person you paid and the part that goes to the IRS. The part that goes to the IRS is used to make sure that the part you sent to the person you paid was included in their tax return as income (sneaky but true). Because what is an expense to you is income to the person you paid.
- The 1099's that get sent to the IRS cannot go by themselves. They need a "covers sheet" also known as a 1096 so the IRS can make sure they got everything and didn't miss a 1099 along the way. Don't let all these numbers trip you up. Just remember a 1099 cannot go alone and needs to be sent along with a 1096 to keep everything organized.
So, that's it - the really quick summary of a 1099 MISC. Now, go forth and lower your taxes...