For many businesses, January is the time of year to send out tax information to their employees. For salaried and employees on your payroll, this is accomplished by W-2 filings provided to both employees and the IRS.
However, what if you employed independent contractors, retained attorneys or paid out other forms income throughout the year? While you may not have needed to withhold taxes for these situations, the IRS may still require you to report the income. This is accomplished with the 1099 form.
Proper 1099 reporting means you need to make sure you get it to the right people. This is accomplished with the W-9 form, which serves this purpose in much the same way the W-4 collects information on employees eligible to receive W-2 forms. Pretty much all the W-9 asks for is contact information and the individual’s Social Security number. If you’re contracting with an entity such as LLC you’ll want to get the EIN instead. It is not necessary to furnish W-9 information to the IRS.
Like the W-2, the 1099 is part of a family of a large number income reporting forms which the IRS calls “information returns.” Many of these forms are extremely specialized and as such are not terribly common; however as a business owner it’s a good idea to familiarize yourself with them. The specific form you’re most likely to file to report independent contractor income is a 1099-MISC, which applies to non-employee compensation.
According to IRS rules, in 2011 you must file 1099-MISC forms so that recipients receive it no later than January 31. If you’re reporting payments in either Box 8 (“Substitute payments in lieu of dividends or interest”) or Box 14 (“Gross proceeds paid to an attorney”), the deadline is extended to February 15.
The IRS must receive 1099-MISC information from you no later than February 28, however the deadline is extended to March 31 if you’re filing electronically. Once a 1099-MISC is received by an independent contractor, that contractor is responsible for reporting it on their taxes.
The 1099-MISC must also be filed with the relevant state tax agency in a timely manner. This is based on where the 1099-MISC recipient lives, not where your business is located. Also keep in mind some municipalities have income taxes in addition to federal and state taxes. The 1099-MISC must be filed with them as well. In other words, even if you’re based in Las Vegas (which has no state or local income tax) but work with a contractor in Philadelphia (which has both), you’ll still need to provide relevant 1099-MISC information to the Pennsylvania Department of Revenue and the City of Philadelphia as well as the IRS.
If in doubt, don’t be afraid to ask your contractors if they have state or city income taxes. Chances are they’ll know. Otherwise, you can consult the American Payroll Association for more information.
In most cases, the 1099-MISC does not have to be filed unless you paid $600 or more in compensation to a single contractor in the preceding tax year. There are exceptions however, such as for royalties. If in doubt, consult with an accountant, enrolled agent or other tax professional.