1099 Tax Software Blog

Running a business is expensive. If you’re the owner or proprietor of a business, then there is only so much that you can do in terms of tax deductions on payments made with respect to the business. Beyond a limit, those payments are capped, and the rest is taxable. However, one method that the IRS offers to increase your deductions and reduce your taxable income from the business is putting to good use the Form 1099-MISC. This form is required by the IRS for employers to report payments made with respect to the business but outside the interests of the firm.

The 1099-MISC is used to report only payments made in the course of business, and not personal payments. Other organizations subject to these reporting necessities include nonprofits, profit-sharing plan or qualified pension trusts, farmers’ cooperatives exempt from tax, and certain establishments exempt from tax under section 501(c) or (d).

While the businesses use the Form 1099-MISC to report such payments, independent contractors are supposed to report all revenues on Form 1040 and Schedule C. These expenses are helpful in reducing the profits from your work or business and hence reduce your tax component payable in that year to the IRS.

Understanding 1099-MISC

The 1099-MISC is used to report those payments that have been made towards jobs or to workers or independent contractors for the jobs undertaken by them. Generally speaking, employers are required to file and report Form 1099-MISC for each individual to whom they have remunerated miscellaneous income, such as royalties or brokerage expenses, rent, services with respect to the business, awards and prizes from radio or TV contests, other income expenditures, healthcare and medical expenses, insurance proceeds, cash purchases paid for fish purchase and to owners of shipping boats from anyone engaged in the trade or business of catching fish, or gross proceeds paid to attorneys during the year.

In short, payments made by the employer for services performed to a business by people who are not its employees, i.e., independent contractors, are to be reported on Form 1099-MISC.Every contractor paid minimum $600 during the tax year is to be reported individually.

Who needs to file a 1099-MISC?

Individuals and entities need to file the Form 1099-MISC,based on IRS rules, with respect to non-wage income and other expenses. First, you need to determine if the concerned payments you made fall in the 1099 category. Any entity or individual who has paid the following amounts in the categories to independent contractors must file form 1099-MISC with the IRS:

• Broker and/or royalties expenditures with respect to dividends/tax-exempt interests in excess of $10, or
• Rent payments, payments towards services with respect to business, TV or radio winnings, awards and prizes, payments towards other income, healthcare and medical expenses, insurance proceeds from crops, cash expenses for fish bought in the fish-catching business or paid for fishing boats totaling an excess of $600, or
• Attorney expenses paid
• Sales of minimum $5,000 of FMCGs to a buyer for resale anywhere but a retail concern.

Who cannot be included under the specifics of the Form 1099-MISC?

The following individuals or entities (not limited to) need not file the 1099-MISC with the IRS:

• If you are employed by a firm or a registered corporation, then you are not supposed to file the Form 1099-MISC.
• Entities or individuals paying for scholarship/fellowship support (student should file return)

When is Form 1099-MISC to be filed?

The Form 1099-MISC must be reported and filed before 31^stJanuary of the following year. Additionally, the employer is also supposed to file and report another Form 1096, which summarizes the contents of the Form 1099-MISC. Form 1096 is not needed if the reporting is done via e-filing. The following dates are the deadline for filing the Form 1099-MISC:

• January 31^st– 1099-MISC Form must be sent to the recipient
• February 28^th – The Form 1099-MISC is to be filed with the IRS physically via paper
• April 1^st – The Form 1099-MISC is to be filed electronically with the IRS

Companies can apply for a 30-day extension to file with the help of Form 8809; however this extension does not extend to the form being submitted to the independent contractor.

What is the process for filing Form 1099-MISC?

The 1099-MISC is a multi-part form. The information on the Form 1099-MISC is to be completed adhering to the detailed instructions supplied by the IRS.  The following 4 copies are to be crated and distributed:

• Copy A to be submitted to the IRS
• Copy B and 2 to be submitted to the contractor for his/her IT returns
• Copy 1 to be given to the tax department of the state, i.e., if it is applicable (physically on paper or electronically)
• Copy C is to be reserved for the employer’s archives

What is the process for e-filing Form 1099-MISC?

• The e-filing of the 1099-MISC can be done online on the IRS website or the individual can download the e-Smart Form of the 1099-MISC on his computer and upload the data and information on the IRS website.
• Additionally, the process of e-filing does away with the copy A of 1099-MISC. However, the additional still need to be given and distributed to the contractors.
• Also, e-filing does away with the necessity to file Form 1096 with the IRS.

Selecting the correct e-service provider for filing Form 1099-MISC

There are certain stipulations to look out for when looking for an IRS-approved e-service provider for filing Form 1099-MISC. They are listed below:

• Should be approved by the IRS (will have the IRS logo on their website)
• Must be secure and safe to trust with important info(check the site’s security certificate)
• Should be user-friendly
• Should be affordable, reasonable and cost effective
• Have ample client assistance service – phone, email, etc.

Printing additional copies for distribution purposes

If the individual has made use of the e-Smart Form version of the 1099-MISC, then the additional copies can be easily printed using Microsoft Word.

If e-filing method has been used, then additional copies can be printed after the submission of the e-file.

The excel interface can be utilized to import data into the e-Smart Form to create an e-file so that re-typing of information can be done away with. Be careful while using the interface as data could be duplicated or missing. To overcome this problem, copy the cells individually so that the file is structure properly.

Incorrect information and/or amounts on the Form 1099-MISC

In case of incorrect amount or info on the form, contact the firm/business that issued you the 1099-MISC. On the safer side, you should probably wait for the corrected form before you file your tax return. You could also e-mail the Tax Compliance Office of the IRS or call toll-free at 866 258-0908.

Filling the Form 1099-MISC – For Businesses

As a business owner, you need to have the following information with you which will be needed by you while filling the Form 1099-MISC:

• Information of the payer, including your business’ name, address and your federal employer ID number and the recipient’s/contractor’s ID number.
• The amounts mentioned earlier which fall under the purview of 1099-MISC must be ready with you to be entered and mentioned. The amounts are to be entered separately in the appropriate boxes.
• You are also required to state in Box 4 any amounts of income tax withheld from payments to the contractor.
• You are also required to state Section 409A deferrals and revenues in Boxes 15 (a) and (b).
• In the area with respect to the Local and State Info, any information regarding state tax without will be stated including the amount and the payer’s/state’s number. If the info has more than 2 states, you will need to fill another 1099-MISC Form.
• Double check the amounts and info on the form and then print and distribute the forms as outlined earlier.
• Lastly, you must organize and submit Form 1096 to the IRS which summarizes and totals all the amounts and the information of the 1099 forms.

Significance of Form 1099-MISC for Contractors

If you’re an independent contractor, then you are eligible to receive the form 1099-MISC by 31st Jan which will be used to report your income as an independent contractor to the IRS. It basically indicates to the IRS how much revenue you earned from a particular establishment.

Box 7 on the Form 1099-MISC features “Non-employee compensation”, which will be filled in with your annual revenue from the firm, concern or establishment that employed you will be stated. The contractors are then needed to report and file the same incomes on Form 1040 Schedule C, and this will be filed it with the IRS. Hence the 1099-MISC along with the Schedule C will be used by the independent contractors to report for their tax purposes. Hence, what objective the W-2 serves for employees of a company, the 1099-MISC does the same for the independent contractor who is self-employed.

Independent contractors must remember that they should complete the 1099-MISC form even if they receive, let’s say $400 from one employer and $500 from the other. Even though their income is not from one source, since it exceeds $600, they will be liable to file Form 1099-MISC with the Schedule C.

Penalties for not filing the Form 1099-MISC

Centered on how late and when you file the return with the correct info, the penalties for late filing are:

• $30 per info filed correctly within 30 days (maximum penalty $250,000/year limited to $75,000 for small industries).
• $60 per info filed correctly between 30 days (March 28^th)and 1^st August (maximum penalty $500,000/year limited to $200,000 for small industries).
• $100 per info filed correctly after 1^st August (maximum penalty of $1,500,000/year limited to $500,000 for small industries).
• $250 penalty for deliberate failure to file.

You receive a monetary gift as appreciation or a thank you for something you did.  Later, you receive a form 1099-MISC reporting that “gift” as other income to you and to the IRS.  What does the recipient, in this case, do?

Gifts or awards or prizes for services not performed count as other income.  If the gift is $600 or more, then its the payer’s responsibility to prepare and send a 1099-MISC reporting the value of the gift.  The taxpayer must report this amount as other income on Form 1040.

Many people say “but it was a gift”.  If the gift was $600 or more, the payer was legally obligated to report this.

The 1099-MISC has Copy A, B, C, 1 and 2.

Copy A is sent to the IRS along with the 1096.

Copy B is sent to the recipient and the recipient keeps that copy.

The payer or the business issues the 1099-MISC forms to vendors/contractors should retain Copy C.   You don’t have to print and store.  Instead, you can retain a PDF of copy of these forms.

Copy 1 is sent to the State Tax Department.

Copy 2 is to be filed with recipient’s state income tax return, when required.

Contract workers, or freelancers, are workers who are hired on a project-by-project basis.  The IRS 1099-MISC form is used by employers to document the earnings of contract workers.

More and more businesses are hiring contract workers because their costs are generally lower than W-2 employee costs.

This is because contract workers’ earnings do not require deductions of social security, income and state tax, unemployment, health insurance, or any other type of deferred compensation.  Contractors are required to calculate any tax deductions and pay any taxes owed to the IRS on their own.

At the end of the tax year, the 1099-MISC form is sent by employers to any contractors hired during the year, and it is also submitted to the IRS for income tracking purposes.

Some examples of workers that would receive a 1099 form at the end of the tax year include freelance writers, artists, contract IT specialists, temporary laborers, and more.

Form 1099-MISC is a 5 page form where Copy A is sent to the IRS, Copy B is given to the payee or recipient and Copy C is retained by the filer or payer.  Copy A has the look and feel of  a normal sheet of paper while the other copies are almost like tissue paper. The 5-pages are connected together by a perforated edge.

The IRS requires that Copy A be submitted on their special paper with red ink if you are submitting less than 250 filings a year.  Otherwise, the IRS encourages you to submit electronically. Filing Information Returns electronically is very cost-effective, is easier than filing on paper, and is more accurate. Filing status is available within 2 business days for Forms 1098, 1099 and W2-G and electronic filers receive a later due date for most returns. When you file electronically, you are exempt from using pre-printed forms.  You can just print the Copy B on plain paper with black ink, email a PDF file to all recipients, fax Copy B to the recipients or just print it out and hand it to the recipient.

The 1099-MISC form is the most popular form to report contract worker earnings.  The other variations of the 1099 form are used to show interest and other types of earnings.

I hear this question often.  You hired and paid someone $600 or more within a calendar year to do some type of work.  When tax season arrives, you realize that the contractor you hired has moved.  Now what?

You, as the payer, have to do something.  Here are a few things you can do:

1. Call the contractor and try to get their new mailing address. You don’t have to mail Form 1099-MISC to the recipient.  You can print it out and hand it to them.  Or fax it or email it.  You just want to make sure they get the form and its data.
2. If you have his or her last known address, then contact the postmaster or local county clerk to see if they have the new address for this contractor.
3. Send the information return to the last known address that you do have.  If the letter bounces back to you, then you have made an effort.  You can still report the 1099 information to the IRS and the IRS will be able to track the TIN and the amount reported.

Doing nothing is not a good option.  You want to paper or electronically file the data with the IRS.  And make an effort to get Copy B of Form 1099-MISC to the contractor; take notes on the steps that you took and save them.

1099 software at the site 1099fire.com has software for paper and electronic filing of all 1097, 1098, 1099, 3921, 3922, 5498, 8027, 8955-SSA, W-2G, and 1042-S IRS tax forms. Import, print and eFile information returns the quick and easy way!

1099FIRE is the only company to offer OneTouch E-Filing. Just click a button and the software will automatically log in and upload your file to the IRS FIRE system.  You will receive verification within seconds of receipt of your file.

Filing Information Returns electronically is very cost-effective, is easier than filing on paper, and is more accurate. Filing status is available within 2 business days for Forms 1098, 1099 and W2-G and electronic filers receive a later due date for most returns.

When you file electronically, you are exempt from using pre-printed forms.  You can just print the return in regular paper or email a PDF file to all recipients.

Information returns are documents that record payments by individuals, estates, corporations, and trusts to any other party. There are over 30 types of information returns that are required by the Internal Revenue Service to report transactions. The IRS requires that information returns are sent to both the payment recipient and the IRS. Payment recipients require a copy of information returns to calculate their own taxes and also to match the IRS’s record of their income. Most information returns must be submitted to the payment recipient by the end of January and to the IRS by the end of February. A few other types of information returns have different deadlines.

Information returns are a continually changing sector of the tax industry because of the complex nature and variety of transactions in business. There are dozens of types of payments that should be reported by information returns including wages, severance pay, rents, gambling winnings, annuities, royalties, and many more. The minimum amount that requires reporting varies depending on the type of payment. For instance, for most but not all types of 1099-MISC payments, the minimum amount that must be reported is $600 or more. However, for interest payments, which are reported with the 1099-INT form, any income above $10 requires reporting to the IRS.

Businesses and individuals have recently become more scrutinized by the IRS for not filing information returns. Because of information returns being purposely miscalculated or not reported, there is a substantial tax gap – the difference between taxes that are actually paid and should be paid – that is over $300 billion per year (as estimated in 2005 by the IRS).

The IRS recovered approximately $50 billion of that unreported income, leaving $250 billion more that could potentially be recovered. Thus, the IRS has every incentive to penalize and audit businesses and individuals that do not correctly report their payments with information returns. The IRS has openly stated that they are seeking to regulate information returns more because of this gigantic tax gap. In the future, more laws will likely be passed that will penalize late or unreported information returns.

The two most familiar types of information returns are the 1099 and W-2 form. The 1099 form is used to report the earnings of contractors while the W-2 form is used to report the earnings of employees. Although it is sometimes unclear, it is important for both businesses and contractors to know the difference between an employee and contractor for tax purposes. This is because the difference affects tax withholdings and other tax calculations. If for any reason the difference is unclear, then IRS Form SS-8 can be used to differentiate between the two. A business, employee, or contractor can fill out the form and send it to the IRS, and they will officially determine the classification of the worker.