It’s that time of year again; the time to make sure you have updated W-9s on file. Or even better to make sure you have any W-9s on file for people and businesses you do business with. Okay okay, let’s back track a little and get an overview of what’s going on. Form 1099-MISC are due January 31st and some key information to fill them out comes from the W-9 of people you do business with.
What is a 1099-MISC?
A 1099-MISC is a federal reporting form that businesses, or individual engaged in business activity, are required to file annually in which they report certain payments made in the course of doing business. Nonprofit organizations, although traditionally aren’t considered to be “in business” fall under this classification for 1099 reporting. This form includes the recipient’s name, address, tax ID number, and reportable payment received.
How do I know if I need to send someone a 1099-MISC?
This is the question of questions. Let’s look at it in steps.
What was paid for?
The most common boxes used on Form 1099-MISC are Box 1 – Rents and Box 7 – Nonemployee Compensation, so we will focus on those.
Rent – Office rent, land rent, equipment rent, etc.
Nonemployee compensation – payments made for services received from someone other than an employee. Examples: housekeepers, repair crew, lawn service, outsourced IT work, CPAs, marketing firms, laborers.
This includes services that require parts or materials to complete. Last month the office toilet broke (it was tragic!!) so I ran to the store and bought a replacement part to fix it. I am not required to provide the store with a 1099s for the tangible parts and I did the repairs myself , thus no one else was paid. Now, had I called a plumber who came in with his own materials and did the maintenance work for me I would issue him a 1099 (subject to additional limitations below) for the total invoice which includes labor and materials.
Who was paid?
If you write your check to Santa Claus for delivering your company’s products then likely, you’ll have to issue him a 1099. If the check is made payable to Santa Claus Enterprises Inc., then chances are you won’t be issuing him a 1099. This is where those handy W-9s come into play. Section 3 of Form W-9 shows tax classification which determines if a 1099-MISC is required to be filed for that business. If they are tax as a Corporation (S or C) then generally you are not required to issue them a 1099. Individuals, sole-proprietors, single member LLCs, and partnerships receive a 1099-MISC for services rendered.
How much was paid?
For rents and nonemployee compensation the reporting threshold is $600 within a calendar year. This includes labor and parts where applicable. If you first use a service provider in January it is essential to get a W-9 from them at that time even if the amount is under the threshold in case you use them again.
How was it paid?
Only payments made by cash, check, bank draft, and wire are reportable for Form 1099-MISC. Payments made for services by credit cards are the reporting responsibility of service providers merchant account company. My lawn guy is a sole proprietor, sometimes I pay him cash and sometimes I direct deposit the funds to him, for the year it totals over $600.00. I would issue him a 1099 for the full amount. If before year end, he starts accepting credit cards I would only issue him a 1099 for the amounts paid by cash and direct deposit, not the credit card portion. (And yes, you still must issue a 1099 even if you pay people in cash.)
Simple enough; right??? Use this guide as a place to start. IRS.gov provides a slew of resources and guidance on the additional requirements and caveats.