Last week two of my clients expressed some confusion over 1099 contractor payments, and I thought,
Hmmm, this discussion would probably be relevant and helpful to many of my readers.
Plus, the end of the year always comes quicker than you expect… so if you haven’t already collected W9 forms, it’s easier to start now than later!
So, here’s what I was asked:
Is it really necessary to report 1099 contractor payments?
You want to report any of your contractors who you pay at least $600 per year.
But, before I get into the details of WHY, let’s make sure we’re starting on the same page:
- Make a list of anyone your business pays for any kind of services.
- Now exclude from this list anyone who is on your company’s payroll (basically, your employees). All of the remaining individuals and companies on this list are your subcontractors (also called contractors for short)
- Now, look at the list, and figure out who you expect to pay $600 (or more) by the end of the year. The remaining individuals and companies on this list are the contractors that federal law requires you to report each year on 1099-MISC forms.
Popular Misconceptions about 1099 Contractor Reporting for Your Small Business
For whatever reason, there’s a popular misconception that business-hired professional advisers (such as lawyers, accountants, therapists, etc.), as well as people who provide labor (such as janitorial service and/or repair work) should not receive 1099s.
Here’s the truth: they’re not exempt, and if you’re business hired them, it should be reported via the 1099-MISC forms.
How to collect the needed info
Requiring contractors to fill-out a W9 form is the easiest way for you to collect the contact and legal info you need for 1099s forms.
In fact, I think the best policy for businesses is to collect a W9 form upfront (before sending payment to the contractor), because then you’ll have their info, you’re less liable, and you will know whether or not you need to report the payments using 1099-MISC forms.
The W9 form, itself, collects the contractor’s legal name, address, EIN (or social security number), and legal status (Individual, LLC, Corporation, etc.)
Generally, payments you make to corporations do not need to be reported via 1099 forms (see the IRS’ 1099 instructions here); however, if your business makes payments to corporations in the medical, health care, legal and fishing(!) industries, you must file 1099-MISC forms for these payments.
Most of the time, when you receive a W9 form from someone operating as a corporation, you can just file the W9 and not worry about reporting via 1099-MISC forms.
What happens when a a 1099 contractor doesn’t want to provide you with a W9 form?
So, what if a 1099 contractor says, “I don’t do W9s,” or worse yet, does the job, receives payment and fails to return the W9?
Well… if you find yourself in that position, you’ll have a difficult decision to make.
You may like working with the contractor, but if your business gets audited, you’re the one that the IRS is going to fine for not reporting contractor payments. (Surprise!)
Meanwhile the contractor who did not report the income received from you will not be fined (though they’ll probably owe money and pay penalties for late payment).
So, to keep your financial and legal liability low, there might be times where you decide not to hire a contractor who isn’t comfortable in giving you their legal contact info.
A few additional things to be aware of:
- When sending a 1099 to your landlord, make sure it’s mapped as rent (this is very easy if you use QuickBooks Online).
- Make sure you only report business payments via 1099 forms. In other words, don’t issue 1099-MISC forms for payments that were personal expenses.
- Contractors you hire may have their own employees or hired contractors. That’s fine. Any people hired by your contractor, are the contractor’s responsibility to report.
Any thoughts or questions about 1099 contractor payments or filings?
Always love to hear from you in the comments below.