A Form 1099-MISC must be filed for each person (see exceptions below) to whom you paid during the year:
1. at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
2. at least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, or, generally, the cash paid from a notional principal contract (e.g. interest rate swap) to an individual, partnership, or estate;
3. any fishing boat proceeds; or
4. gross proceeds of $600 or more paid to an attorney.
In addition, Form 1099-MISC must be used to report direct sales of at least $5,000 of consumer products made to a buyer for resale anywhere other than a permanent retail establishment. Form 1099-MISC must also be filed for each person from whom you may have withheld any federal income tax under the backup withholding rules, regardless of the amount of the payment.
You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business; personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit. For this purpose, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.
You do not need to file a 1099 for payments made to a corporation, wages to an employee, certain payment card transactions if a payment card organization has assigned a merchant/payee Merchant Category Code (MCC) indicating the reporting is not required (note that this is not an exhaustive list; see your CPA). Attorney corporations are not exempt. You are required to file a 1099 for payments to attorneys of $600 or more in the calendar year.
Send the forms to the recipients by January 31 and to the IRS by February 28. Failure to do so subjects you to a $30 penalty per 1099 if filed by March 30; $60 penalty if filed by August 1; or $100 penalty if filed after August 1, up to a maximum $500,000 penalty per year for a small business.
Be careful you are not mistaking an employee for a subcontractor entitled to a 1099. The IRS, Labor & Industries (L&I) and Employment Security have their own separate rules to determine who qualifies as an employee rather than a subcontractor. In general, it’s an issue of who has control over the work, who supervises the work and who supplies the worker with the needed tools and training. The problem is usually discovered when the subcontractor gets hurt or out of work and applies for worker’s compensation or unemployment benefits. The “employer” then has to defend themselves or face major back taxes and penalties.
If you do hire legitimate subcontractors, make certain you check the L&I website to see if the subcontractor is in compliance with filing and payment requirements. Failure to do so can result in L&I assessing the tax to your company for the subcontractor’s time on your job.
Robin Hayden, MBA, CPA, is a Certified Fraud Examiner with 23 years experience in public accounting. A shareholder at Houck & Associates, PC, Certified Public Accountants, she can be reached at 360.892.4348.