There are a number of situations where you’ll have to create and/or file Form 1099s. Are you affected?
If you’ve been sending Form 1099s for years, you’re probably already working on them or have completed them. If you receive them regularly, they should be on their way to you soon (if they haven’t already arrived), waiting to be used in the preparation of your income taxes.
But if you’ve never sent one, it’s worth a look at your financials to see if you should. There are countless scenarios that would make that necessary.
On the Receiving End
There are several types of 1099s. If you are not involved in a business or trade, you don’t have to worry about sending them. You might get one or more if you, for example:
- Received interest income from a deposit account, like a CD. Financial institutions are required to dispatch 1099-INT forms to taxpayers who made money during the calendar year in this way.
- Were granted debt forgiveness for a loan. Debt forgiveness represents income, so you should get a Form 1099-C.
- Made money on a real estate transaction. A Form 1099-S will be sent to you.
- Are a merchant who receives payments via credit cards or PayPal, or who sells on eBay, for example. The Form 1099-K has only been in use for a few years. If you receive one and don’t understand why, or you think you should have gotten one and didn’t, contact us.
Figure 1: The 1099-MISC will look familiar if your business pays money to independent contractors or other individuals who are not official employees.
The Form 1099-MISC
As a small business, the 1099 that you will be most likely to complete and send out is the 1099-MISC (Miscellaneous Income). This form covers a lot of ground. It must be provided to anyone that you have paid at least $600 to during the tax year. This includes:
- Payments to independent contractors, freelancers, or individuals who provide services to you but are not employees of your company (like an attorney),
- Rent (office space, machine rental, etc.), and,
- Other income, including prizes and awards.
These are some of the most common types of payments that must be reported on Form 1099-MISC, but there are others. And there are many exceptions. If you have never filled out a 1099 or you have any doubts about whether you need to (and how to do so), please let us know.
It’s critical that your Form 1099-MISCs are completed with 100 percent accuracy. Besides the fact that the IRS requires it, the amounts that you report will have impact on the tax returns of the recipients. For example, most taxpayers who receive a 1099-MISC that contains an amount in Box 7 (nonemployee compensation) are subject to the self-employment tax. That number needs to be right.
A Word About Tax Planning
By the time you’re reading this, any tax law changes for the 2015 tax year will have been finalized. Many were in the works, in areas like the Affordable Care Act, deductions and exemptions, and IRAs. In addition, tax credits that were due to expire may have been extended.
If you’re preparing your taxes on your own, you will see these changes reflected in IRS forms and instructions. So it should not be a problem to take advantage of any that affect you.
But the thing is, if you make tax planning a year-round effort, you’ll be able to make business decisions about income and expenses based on not only these potential modifications, but on your financial situation as a whole – 365 days a year.
This means more than just hurriedly making charitable donations in December. It involves careful attention to your finances starting January 1. And it means knowing what reports to run, what projections to make, and how to analyze all of that information.
We’d be happy to help you with this. Financial planning is an area where we have a great deal of expertise. We know not only what data needs to be pulled from your accounting files, but also how to interpret it. So consider working with us on this, and making 2016 the year that you finally feel confident and informed about your company’s financials.