This is a guest post by Shauna Wortinger, a Certified Public Accountant who specializes in small and growing businesses. Visit her website by clicking here.
When you pay an individual or an LLC for labor services, rent or interest on a loan, you are required to submit a 1099 form to the IRS. For the tax reporting year of 2015, these forms are due to the individuals by Monday, February 1, 2016 and to the IRS (if you file electronically) by March 31, 2016. The IRS has been increasing the penalties for not submitting these forms. Just this year, for 2015 reporting, they doubled the penalty to $100 per form for not filing. As a business you are ‘helping’ the IRS by reporting this information, so that the IRS can match the monies paid against their personal tax returns making sure the individual is reporting the proper income and paying the appropriate tax.
In 2011, the IRS imposed new requirements on third party payment processors such as credit card companies, Paypal, and the like to now report the payments they pay out on Form 1099-K. This has closed the gap on those funds being reported to the IRS. Since these third party payment processors have computer systems in place where they have the name, address, tax ID’s, and dollar amounts paid out to their customers, it wasn’t too difficult for them to begin reporting this information to the IRS.
What does this mean to you as a small business owner?
You do not need to report any payments you make via credit card, Paypal, and the like. If you were to report these payments, those individuals would receive a 1099-K from their merchant company for the same money that you would report to them on a 1099-MISC. It would incorrectly double the income reported to the IRS. You only report cash, checks, or wire transfers you pay directly from your bank.
In the tax profession there is debate about whether an LLC should be receiving a 1099-MISC as they are not required to be issued to corporations. However, with an LLC they can be organized as a corporation, but also as sole proprietorships or partnerships. So, I personally advise my clients, it is better to be safe and just issue the 1099 also to LLC’s.
So, who should be receiving a 1099 from your company?
In order to report this information to the IRS you will need the name, address, SSN or EIN (Employer Identification Number) from these individuals and LLC’s. The best practice is to have them fill out a W-9 the first time you pay them, just like you would require an employee to fill out a W-4 when you are hiring. Don’t wait until the end of the year as it can be difficult to find these individuals if you have not paid them in a while. I have found that individuals will fill out the W-9 if you hold their payment until you receive their W-9 form.
You can get the W-9 directly from the IRS website. https://www.irs.gov/pub/irs-pdf/fw9.pdf