If you have a business, chances are you’re going to have to think about preparing Form 1099s at some point. There are a number of different types of Form 1099s, such as:
- 1099-A, Acquisition or Abandonment of Secured Property
- 1099-B, Proceeds From Broker and Barter Exchange Transactions
- 1099-C, Cancellation of Debt
- 1099-CAP, Changes in Corporate Control and Capital Structure
- 1099-DIV, Dividends and Distributions
- 1099-G, Certain Government Payments
- 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments
- 1099-INT, Interest Income
- 1099-K, Merchant Card and Third Party Network Payments
- 1099-LTC, Long-Term Care and Accelerated Death Benefits
- 1099-MISC, Miscellaneous Income
- 1099-OID, Original Issue Discount
- 1099-PATR, Taxable Distributions Received From Cooperatives
- 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530)
- 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
Questions regarding the Form 1099-MISC are the most common questions this time of year. If you paper file the forms, you need to do that by January 31, 2020.
If you pay rent to a landlord for a business property, you need to prepare a Form 1099-MISC for the rent you’ve paid. You are not required to prepare a Form 1099 if you pay the rent to a real estate agent or property manager.
If you have real estate in your own name and rent it out long-term, you do not necessarily have to prepare a Form 1099-MISC for work performed on your property. However, if you don’t file the 1099s, you can’t take advantage of the 20% income deduction for qualified business income.
As a business owner, you are much more likely to need to prepare a Form 1099-MISC for contractors who do work for you. Remember that you could also have a business if you own real estate and rent it out short term such as with AirBnB or if you flip property. In that case, the stricter Form 1099 rules apply.
The rule is that you need to send 1099s to anyone that you paid $600 or more to in the year. The payments have to be for services and to non-corporations. In other words, if you pay a corporation, you don’t need to prepare a Form 1099. If you pay less than $600 you don’t need to prepare a Form 1099. If you buy goods or products from someone, you don’t need to prepare a Form 1099.
It’s for $600 or more in a year paid to a non-corporate entity and paid for services.
There is one more exception. If you paid your vendor with a credit card, payment card or gift card, then you also do not need to issue a Form 1099. If you paid some via cash, check or direct cash transfer, then that portion would be subject to the Form 1099 reporting rules. The portion that does not would be that paid with the credit card, payment card or gift card. A payment card includes a debit card, PayPal card or other similar card.
And one more exception to the exceptions. If you pay a lawyer, you have to give him or her a Form 1099. It doesn’t matter if they have a corporation. The IRS wants you to give them a Form 1099.
Let’s take this a little further. Let’s say you DID pay your worker $600 and you don’t have a social security number or EIN. They don’t operate in a corporation and the payment wasn’t made through credit card or other exempted type of payment.
Obviously, if they won’t give you the number, you can’t prepare the form. You could take the deduction and then be prepared for the IRS to deny it if you’re audited. Or you could just forego the deduction your return. If you take the deduction anyway and not report, you’re looking at a denial of the deduction and a penalty, plus penalty and interest for taking a deduction you’re not entitled to. The penalty for not filing the Form 1099 is usually $100 per form, but it can be as high as $250 per form if the IRS determines you have a systematic disregard for following the rules regarding the Form 1099s. It’s a subjective test, so chances are you probably need to consider the $250/form penalty as what you’ll get.
A better answer may be to not take the deduction and instead chalk this up as a lesson learned and start this year, 2020, with a new strategy. Not filing the form 1099 will also prevent you from talking the 20% deduction for pass through income.
EVERY SINGLE PERSON that you pay money to for services has to give you a Form W-9 first. No W-9, no payment. Period. If they try to complain or report you for not paying, you are completely justified in withholding the payment until you get the information you need to comply with the law.
You could wait until your total payments for 2020 approach $600 or you could simply require it from the beginning.
Either way, make sure you get the information you need to file the required 1099s.!
Got a tax question? Bring them to the next coaching session (first and third Wednesday of the month at 5 pm Pacific) or include them in your private consultation.
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