Whether you’re working your side hustle or working your business full-time, issuing 1099s is a crucial, yet often overlooked aspect of running a small business. Can you really afford to ignore your obligation? It’s a pretty expensive mistake.
Who needs to file Form 1099-MISC?
Any business that makes payments for services, non-employee compensation, rent, real estate sales or prizes of $600 or more to any one person or entity during the year is required to issue Form 1099-MISC.
At first, it may seem as though that requirement doesn’t apply to freelance and side-hustle businesses, but it definitely can if you paid $600 or more to a virtual assistant, website designer, lawyer, accountant, or any other independent contractor.
There are a few exceptions. You don’t need to send a 1099-MISC to sellers of merchandise or corporations. However, you are required to issue one to attorneys, even if they are incorporated.
BUT . . . if you paid with a credit card or through a third-party payment network (e.g., PayPal), don’t include those payments on Form 1099-MISC. Those amounts will be included on Form 1099-K issued by the merchant or payment network.
Penalties for failing to file Form 1099-MISC
Many freelancers and small businesses fail to file Form 1099-MISC, either because they aren’t aware of the requirements or assume that non-compliance will earn them a slap on the wrist at most.
A few years ago, the penalties weren’t that severe, but in 2015, Congress passed the Trade Preferences Extension Act of 2015, which included a substantial increase in failure-to-file and late filing penalties, effectively doubling the fines.
Failure includes filing the forms late, failing to furnish a copy to the recipient, failing to provide all required information, or failing to provide correct information. Penalties for general failures can run as high as $250 per return, with an annual cap of $3,000,000. But because the increased penalties apply to both the copy filed with the IRS and the copy provided to the payee, the penalties essentially total $500 per form with an annual cap of $6,000,000.
Intentionally disregarding the filing requirement is even more expensive. The penalty for intentional disregarding Form 1099 filing will cost $500 per return with no annual cap. Again, penalties apply to both the copy filed with the IRS and the copy provided to the payee, so penalties for intentional disregard will cost $1,000 per 1099 with no annual cap.
Deadline to File Form 1099-MISC
Form 2017 1099s, businesses must send Copy A of Form 1099-MISC to the IRS by January 31, 2018, when you’re reporting non-employee compensation payments in Box 7. You’ll send all of your Copy A’s along with the transmittal form, Form 1096, that totals all of the information from your 1099s. If you’re NOT reporting nonemployee compensation, you have until February 28, 2018, to file by paper or March 31, 2018, if filing electronically.
You must send Copy B of Form 1099-MISC to the recipient by January 31, 2018.
Sen Copy 1 to your state tax department. Copy C is yours to keep.
Make 1099 Filing Easy
The good news is you don’t have to wait until January to get started with the 1099-MISC filing process.
- Rather than waiting until January and then scrambling to gather information and comply with filing deadlines, make sure you have a Form W-9 on file for all vendors and contractors. Most of my clients ask me for a completed and signed Form W-9 as a condition of issuing payment. The information on Form W-9 is needed to prepare 1099s, so gathering that info before releasing any payments ensures you’re not scrambling for addresses and social security numbers with the deadline looming.
- In January, electronically file 1099s online through Yearli by Greatland. You can stay compliant for just $4.99 per 1099. Yearli will e-file state and federal 1099s, mail a copy to the recipient. Plus, all of your data will be saved from year to year, saving you time in the future. I think $4.99 is a steal, but if you want an even better deal, use promo code U72 when you file and get 15% off your filing.
What if I receive Form 1099-MISC?
As a freelancer, you may be on the receiving end of Form 1099-MISC. Before you prepare your tax return, add up the total of all 1099-MISC forms and make sure that the income you’re reporting on your return is greater than or equal to that total.
Why? As mentioned above, a copy of Form 1099-MISC is sent to the IRS. The IRS uses these forms to match up income reported on your behalf to income reported on your return. If the totals from all 1099-MISCs issued on your behalf exceed the income reported on your return, the IRS will send a CP2000 Notice proposing additional taxes (and possibly penalties) you might owe for missing income.
You’re required to report all income received from your trade or business, regardless of whether you received a 1099-MISC, so don’t let the lack of a form prevent you from reporting all of your income.
In fact, I was surprised by how few 1099s I received last year. But I still reported my total income. I didn’t have to rely on 1099s to know how much I earned because I track all of my income and expenses in FreshBooks.
Check out the blog I wrote for FreshBooks if your 1099 is wrong or includes reimbursed expenses.
The requirements for Form 1099-MISC may seem complex, but it’s actually pretty simple to follow the rules once you
- know whether the filing requirements apply to you,
- track income and expenses, so you know how much you earned and how much you paid out,
- request Form W-9 from all contractors before issuing payments, and
- File Form 1099-MISC electronically.
If you have any questions or need some help getting started, feel free to reach out!