Posted about 2 years ago

How to File a Form 1099-MISC for Independent Contractors

Question:

I have heard that I have to complete a 1099 tax form for independent contractors I pay through my business. Can you explain to me how I determine who gets a 1099-MISC form and how I file it with the IRS?

Answer:

Ok, you are an entrepreneur and you just started your first side business. Congratulations! You are now pursuing the American Dream of starting your own business and gaining financial independence. Feeling good, right?

Then someone probably mentioned to you that you have to provide your independent contractors these forms called 1099’s. Now the feeling of confusion, dread, and fear have creeped in as you realize you have to fill-out an extra set of tax forms and file them with the IRS. This can be a little overwhelming at first.

However, your question is a really common question and completing these forms is not difficult if you have good records and are willing to take the time to learn some tax basics. This post is going to provide you an overview of how to complete a 1099-MISC, who has to file them, and provide an example of how to fill out the necessary forms to stay in compliance with IRS regulations.

In order to provide the simplest explanation of Form 1099-MISC I have broken this article into the following five questions and answers:

  1. 1. Why does the IRS make me file a form 1099-MISC?

  2. 2. How do I determine who I have to provide a 1099-MISC Form?

  3. 3. What tax forms do I have to file with the IRS?

  4. 4. What are the due dates to file the tax forms?

  5. 5. A quick example of completing a 1099-MISC and Form 1096.

  1. Why does the IRS make me file a form 1099-MISC when I pay Independent Contractors?

The IRS requires businesses to file Form 1099-MISC in order to help prevent independent contractors from underreporting their income and not paying enough income tax. Since business owners are reporting directly to the IRS the amount of revenue that was paid to their independent contractors via form 1099-MISC the IRS knows the minimum amount of revenue that should be included on each independent contractor’s tax return each year.

For example, if Joe Plumber received 1099’s totaling $50,000 for the tax year from multiple clients and he reported revenues of $40,000 the IRS would immediately know he underreported his income. This would get Joe Plumber flagged for an audit. The form 1099-MISC is therefore a key tool in the IRS combating underreporting of income by independent contractors.

  1. How do I determine who I have to provide a 1099-MISC Form?

Ok, so when do I have to file a form 1099-MISC? The following list isn’t comprehensive and I recommend you read the IRS Instructions for Form 1099-MISC for detailed instructions if you have more than a simple 1099-MISC to complete.

You are required to file a 1099-MISC:

  • If you pay more than $10 of royalties or broker payments in lieu of dividends or tax-exempt interest. This doesn’t affect most of us so I won’t spend more time on it.
  • If you pay $600 or more for:

    • Rent (box 1)
    • Services performed who is not your W-2 employee (box 7)
    • Prizes or awards – If you win over $600 on a game show they will send you this form. (box 3)
    • Other Income Payments (box 3)
    • Medical and health care payments (box 6)
    • Crop insurance proceeds (box 10)
    • Cash payments for fish or fishing boat proceeds(box 7)
    • Payments to an attorney

While there are lots of odd-ball type payments listed above that require the filing of the 1099-MISC form I am going to focus on the most common uses for small business owners, entrepreneurs, and smaller real estate investors. These are rent paid and services performed by a non W-2 employee.

Rent paid – If you are paying rent greater than $600 per year then you must file a 1099-MISC and enter the annual rent paid in box 1. However, rents paid directly to a real estate agent are excluded from reporting. So if you rent from a property manager that is also a real estate agent then you don’t have to include this on the form 1099 you file with the IRS. If you rent from an individual or a business that is not a corporation, then you need to complete a Form 1099.

Services Performed by Someone who is not your W-2 Employee – If you hire an independent contractor such as a plumber, handyman, lawn worker, painter, computer technician, etc. it is required that you report these payments in box 7 of the Form 1099-MISC. Payments to corporations do not require the filing of a form 1099.

So if you hire a plumber and pay them $5,000 to install a water heater you will report the total $5,000 in box 7 of the 1099-MISC. Include both the parts of the payment that are for labor and materials provided by the plumber. If however, you hire a plumber and pay him $500 in labor and then go to Home Depot and buy $4,500 of materials for the job out of your own pocket you will not be required to file a form 1099. This is because the independent contractor earned less than $600 that year from you and Home Depot is a corporation. Small businesses are not required to file a 1099-MISC when you purchase materials from corporations.

  1. What tax forms do I have to file with the IRS?

Ok, so now you know what type of payments require you to file a form 1099-MISC each year. Now I am going to tell you the different forms that are used to file with the IRS. There are three forms that will be used during the process of gathering required information from the independent contractor, issuing the 1099 to the contractor, and filing the forms with the IRS. These are the W-9, 1099-MISC, and Form 1096.

Form W-9 – The W-9 is formally called the “Request for Taxpayer Number and Certification”. It is used to request information from the independent contractor that will be needed by you to complete a Form 1099. This includes the independent contractor’s name, address, type of entity used for their business, and taxpayer id.

You can print this form off from the IRS website at https://irs.gov/pub/irs-pdf/fw9.pdf. Give it to your independent contractor and have them complete it, sign, and give back to you. Save this form in your files for year end. This will provide you the information you need to file 1099 tax forms at year end.

Quick Tip: Be sure and get the independent contractor to fill out the W-9 prior to paying them for the job. It is best to let them know when you are bidding the job that you require this document from all independent contractors that you work with. Independent contractors are notorious for not wanting to report income for taxes and once they get paid they have no incentive to give you needed information so you can issue them a form 1099. Since the IRS requires you to file a 1099 for contractors that you pay over $600 this can leave you in a difficult situation if the contractor refuses to provide this information after you have already paid them.

Form 1099-MISC – A separate 1099-MISC is prepared for each independent contractor that was paid over $600 in a given year. There a five carbon copy forms for each 1099-MISC that you prepare for each contractor. They are as follows:

  • Copy A – You will send this copy to the IRS along with Form 1096
  • Copy B – Copy for recipient (independent contractor) to keep for their records.
  • Copy C – Copy for you to keep as the payor.
  • Copy 1 – State Tax Department Copy
  • Copy 2 – For recipient to file with State Tax Return.

Quick Tip to Save Money: The IRS requires that the “Copy A” version of the 1099-MISC and Form 1096 that are mailed to the IRS be an original copy printed with special red ink so they can be scanned by the IRS. This means that you can’t print a .pdf version from the Internet and use it to file your forms. You can either get these forms at an office supply store or order them for free from the IRS. These can be surprisingly expensive if you wait and purchase them at Staples or Office Depot. Save yourself the money and order these from the IRS. It takes about 2 weeks, so go ahead and order the forms you need in late Fall so you will have them ready to prepare in January. Go to https://irs.gov/Businesses/Online-Ordering-for-Information-Returns-and-Employer-Returns to order original copies. I always get several extra in case I make an error and need an additional form.

Form 1096 – In addition to filing the individual 1099-MISC Forms (Copy A) with the IRS you are required to submit Form 1096 “Annual Summary and Transmittal of U.S. Information Returns”. Form 1096 Includes your business name, address, phone number, email address, employee ID, the # of 1099 forms being filed, and total amount of payments being recorded on all of your 1099-Misc.

  1. What are the due dates to file the tax forms?

Date Due to Independent Contractor – Form 1099-MISC are required to be sent to the independent contractors by January 31st of the following year. So for tax year 2015, you must send the contractor’s copy of Form 1099 by January 31, 2016.

Date Form 1096 and 1099 must be filed with IRS – Copy A of all the individual 1099-MISC forms and the Form 1096 must be filed by February 28th of the following tax year.

  1. A quick example of completing a 1099-MISC and Form 1096

In order to demonstrate how to complete a form 1099-MISC and Form 1096 I am going to provide an example of a real estate investor that owns a few rental properties and is required to issue 1099’s.

  • “Bob the Landlord” owns 3 rental houses and paid the following amounts this year.
  • $1,000 of payments to Mike’s Lawn Mowing
  • $500 of payments to Jack’s Painting
  • $2,500 to Home Depot
  • $1,500 in material and labor to Joe Plumber

Based on the above four expenditures, “Bob the Landlord” must provide a 1099-Misc to Mike’s Mowing and Joe Plumber. The $500 payment to Jack’s Painting is below the $600 required threshold and the $2,500 payment to Home Depot does not require a 1099 since it is a payment to a corporation vs. an independent contractor.

Below is what the two completed Form 1099-MISC will look like for Bob the Landlord.

1099-MISC Form Filled Out for Mike's Lawn Mowing

1099-MISC Form Filled Out for Mike’s Lawn Mowing

1099-Misc Filled Out for Joe Plumber.

1099-Misc Filled Out for Joe Plumber.

Below is a sample of the completed Form 1096 for Bob the Landlord.

A Form 1096 filled out for the total of all 1099-MISC filed by Bob the Landlord.

A Form 1096 filled out for the total of all 1099-MISC filed by Bob the Landlord.

Conclusion

I hope this article was helpful and you now understand how to complete a 1099-MISC tax form. 



Comments (5)

  1. No avatar

    Hi Michael,

     I am self employed in NJ and worked as a middle vendor for a software contract position in Massachusetts. The person I hired is from Georgia and lived there temporarily. I am not sure where I should send Copy 1. NJ or GA or MA.


  2. Tiny 1398866209 avatar 423chandler

    Hey Lydia,

    I think there are two questions in your post.

    1.  If you are an investor, flipper, landlord, property manager or business owner you are required to file 1099's if you meet the criteria in the article above.

    2. On the second item; requiring the business license to operate a fix and flip business, I'm going to defer to others to answer that question.  My assumption is that business license requirements  will depend on the city and state you are doing business in.  However, whether you have a business license or not will not effect the requirements to file Form 1099-MISC.

    Hope this helps.

    Michael


  3. Tiny 1481428146 avatar lydias1

    Seeing as how I arrived at this information 'accidentally' i.e. by following links... I lack some of the pre-requisite understanding.

    My newbie question is to request clarification on whether an investor fits the description of a business owner, for the purposes of your post, if they are a house 'flipper' (buy/ fix/ sell) and not a landlord.

    I would not anticipate requiring a business license to buy, fix & sell single family homes....or would your post still apply any time you hire contractors??


  4. Tiny 1398866209 avatar 423chandler

    Hey Terri,

    That's not a newbie question at all.  It's a very good question.

    Contractors that are set up to be taxed as corporations aren't required to have 1099-MISC issued to them by you.  

    Most LLC's will get a 1099-MISC since most are NOT taxed as corporations.  If they are an LLC and are a "single member entity" (disregarded) or a "multi-member LLC that is taxed as a partnership" then they will need to get a 1099-MISC.  That's because they have not elected to be taxed as a corporation.

    If they are an LLC that has elected to be taxed as a corporation then they don't need to receive a 1099-MISC.  Most LLC's are taxed as partnerships or disregarded entities and therefore required to be provided a 1099-MISC.

    Form W-9

    The simple way to find out the contractor's tax classification is is to get all your sub-contractors to fill-out and sign a W-9 where they declare the tax classification of their organization.  In box 3 of  form W-9, the contractor needs to select the "federal tax classification" of their business.  If they select C Corporation, S Corporation, or an LLC with tax classification as a corporation then you don't have to issue a 1099-MISC.  

    If they select 1. "Individual/sole proprietor or single member LLC", 2. "Partnership" or 3. "LLC classified as a Partnership" then you are required to issue a 1099-MISC.  

    Note:  I doubt you will ever see it, but if an independent contractor ever selects "Trust/Estate" consult your tax professional as I'm not commenting on trust/estates.

    Quick tip - If you aren't sure whether to issue a contractor a 1099-MISC you can always err on the safe side and issue them a 1099-MISC.  There is no penalty for issuing a 1099-MISC when you are not required to issue one..  However, there is a penalty if you are required to issue 1099's and you don't.

    Let me know if this helps.

    Michael


  5. Tiny 1428870563 avatar tlbdigs

    Michael,

    This might seem a "newbie" question, but how to do you know if they are an independent contractor or if they are a corporation you're hiring?

    Example (names changed): 

    • I have one entity we have who does regular lawn service (check made out to "Bob Green")
    • we have one entity who repaired a garage door for us (check made out to "Garage Doors R Us")
    • another entity for AC work (check made out to "Bob Storm Heating & Cooling, LLC")
    • another entity for roof work (check made out to "[last name], Inc")

    Can you tell from the names if they are independent contractors?  How do you know?  (I know they aren't employees since we don't tell them how to do the work, but we do have invoices/statements of work for specific jobs for each of them, most have contracts.))

    Thanks in Advance!