Probably the most disliked part about being a business owner is the need for handling taxes. Whether it’s the reporting, filing, or payments, dealing with tax issues are an integral part of doing business. Some business owners even liken it to having teeth pulled due to the sometimes overwhelming details and tediousness. One point that can cause the most pain involves payments that businesses make to independent contractors and vendors. This is due in part to the type of reporting and the forms required to do so. More specifically, it means a business owner must understand IRS Form 1099 including when and how it should apply.
What Is Form 1099?
Form 1099 is a type of information report similar to the well-known Form W-2. It differs from Form W-2 in that it is primarily required for payments made to independent contractors and certain other entities in the course of your trade or business, not for compensation paid to employees. When a business owner pays $600 or more to an independent contractor or unincorporated entity during the tax year, the business owner is responsible for completing Form 1099 and sending it to the contractor or entity and to the IRS. There are several variations of Form 1099, each of which is associated with a specific type of report. For example, Form 1099-DIV is used when reporting dividends and distributions paid in amounts greater than $10.
How Do I Determine Who Receives a Form 1099?
Common recipients of Form 1099 include accountants, lawyers, consultants, web designers, and other independent contractors. However, determining who receives a Form 1099 requires more than identifying a particular profession. The determining factors are the type of entity and its taxation structure. You should complete a Form 1099 for independent contractors who operate as sole proprietorships or partnerships. You should also file a Form 1099 for limited liability companies (LLCs) taxed as disregarded entities or partnerships. A single-member LLC is classified by default as a disregarded entity, and the default tax classification for a multimember LLC is a partnership. As a result, if an LLC chooses not to elect a particular tax classification, a business owner must send the LLC a Form 1099. On the other hand, for LLCs that elect to be taxed as a C corporation or an S corporation, a Form 1099 is unnecessary. There are, however, limited exceptions, for example, for medical and healthcare payments.
If you are uncertain about how the contractors and entities you have worked with are taxed, a common practice is to request that they complete Form W-9, Request for Taxpayer Identification Number and Certification. This form requires them to identify how they are taxed and to provide additional information, such as their business name for tax purposes, taxpayer identification number, and address. But what if you cannot obtain this information and remain unsure about a contractor’s or entity’s tax status? In that case, it is advisable to err on the side of caution and complete a Form 1099: there are no penalties assessed against those who complete too many forms. However, if you do not complete a Form 1099 for a contractor or entity when it is required, you may face sizable penalties for each missing form.
Next Steps
As a small business owner, knowing how the law, including tax law, is extremely important if you want to remain on the good side of the government. Also making sure that your business is set up properly from the ground up is a must. If you are looking to establish your business but have questions about whether an LLC or some other format is right for you, please give us a call or Contact Us today. We’ll help you get things started off on the right foot.
