If you are a business owner and you constantly need assistance with something for your business, there is a huge chance that you are hiring independent contractors.
Now here’s the thing: the IRS has certain compliance duties for firms using independent contractors. Here are the things you need to consider:
· Form 1099-MISC
As a business owner, you must issue a Form 1099-MISC to each unincorporated person or entity that is not your employee to whom you have paid a certain threshold in rents, services (including parts and materials), prizes and awards, or other income payments. This includes individuals, partnerships, LLCs treated as partnerships and sole proprietors, limited partnership, and estate. You don’t need to issue 1099s for payment made for personal purposes. You are required to issue 1099-MISC reports only for payments you made in the course of your trade or business.
Consult with your tax preparer to help you with the filing.
· Adequate record of payments to independent contractors
You should maintain a record of payments to your independent contractors as this will help you track your total payments to them. You will use this to compare it with the annual threshold per vendor.
· Six hundred is the magic number!
You are required to take note of the total amount that you pay to each independent contractor that you hire. If you pay an independent contractor for at least $600, you should file a 1099-MISC for the independent contractor.
Quick Tip: One of the smartest procedures a business owner can implement is to request a Form W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor’s mailing information, TIN, and also require them to indicate if they are a corporation or not which help you decide if you need to issue a 1099 to them or not.
· Take backup withholding into account
Ordinarily, firms hiring independent contractors are not required to withhold any taxes from the payments they make to independent contractors. However, there are cases where you have to do such. Ask your tax preparer to know such cases.
· Payments made electronically
As a taxpayer, you are allowed to exclude from Form 1099-MISC any payments made by using credit card, debit card, gift card, or third-party payment network such as Paypal. These payment networks make a 1099-K in behalf of your payments.
· Attorneys, Physicians, and Corporations
You do not need to file a Form 1099-MISC for payments made to corporations, as well as LLCs who elected to be treated as S or C Corporation. However, fees for professional services paid to attorneys, physicians, and other professionals are required to be reported if paid in the course of a trade or business. This includes payments to medical or legal corporations.
· Contractors’ Expenses
Most independent contractors incur expenses while performing services for their clients. A hiring firm that reimburses an independent contractor for a business-related expense gets the deduction for such expense, not the contractor. As long as the independent contractor follows the adequate accounting rules, and the expenses is an allowable business expense, the hiring firm does not need to include the amount of the reimbursement on a 1099-MISC filed. The reimbursement is not income on the independent contractor’s part.
You do not need to send a 1099 to vendors operating as S or C-Corporations; sellers of merchandise, freight, storage, and similar items; telephone, telegraph, and similar services; or rent to real estate agents.
There you have it! Consider the deadline for filing your 1099s and these reminders at a…
Cheers to a new year!
If you need help with your bookkeeping and tax preparation for your company, contact us today at email@example.com or 832-437-0385.
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