Alas, the mystery of the 1099. It's that first pesky tax requirement of the New Year and often overwhelming. The key to avoiding overwhelm? Proactive Preparation. But first, a little education on the 1099.
In simplistic terms, a 1099 is a form that reports compensation that would not be captured on a W2 (a W2 is used to report employee compensation). Why? Because the government doesn't want any potential tax dollars to slip through the cracks!
Any individual, partnership, LLC, Limited Partnership or Estate that falls within one of the following four categories. Note that you don't have to send 1099s to Corporations even if they fall into these categories (except Lawyers because for some reason the Government doesn't trust them).
1) Contractors You Have Paid > $600: A Contractor is anyone that you have paid for a service. Contractors are Graphic Designers, Accountants, Lawyers, Plumbers etc. Contractors are NOT employees. If you paid a Contractor more than $600 throughout the year, send a 1099, if less, don't worry about it.
2) Your Landlord: This includes anyone you have paid rental payments to throughout the year.
3) Anyone You Have Paid Interest Payments To: If you have a loan you are paying off, you are likely paying off a portion of the principal each month and the rest is for interest. That interest payment must be reported as it is "income" to the debt holder, thus a 1099 is required.
4) Anyone You Have Paid Prizes or Awards To: Did you raffle off a $500 American Express Gift Card at your Christmas Party? Report it! The government needs your money!
Wow, sounds complicated...so...
1099s are required to be mailed (literally picked up by your post man) by January 31st (or the next business day if it lands on the weekend). Thinks that sounds like plenty of time? Think again, hunting down all these people for tax ids and current addresses can be very time consuming.
The key to avoiding a panic attack on January 28th?
Make sure you get a W9 from contractors, landlords and debtors before you pay them. Enter that 1099 information into your accounting system when you receive it. Voila - 1099s are a breeze.
Still overwhelmed? Shoot us a note at HELLO@ACCOUNTFULLY.COM (and feel free to vent).
Fine Print: As this article does not contain all requirements and instructions that the IRS requests, it is highly recommended for you to consult with your CPA or tax expert prior to processing these forms.