Generally speaking, business owners who pay an individual or partnership in excess of $600 during a calendar year for services provided must issue a Form 1099-MISC to the payee. A copy of the 1099 is sent to the recipient who then reports the income on their respective tax returns, and copies are filed with the federal and state governments, creating a record of income for them to match against. The issuance of the 1099 essentially validates your business deduction by ensuring that it is reported as income somewhere else.
Over the last few years the IRS has become increasingly more attentive to Form 1099-MISC issuance as many business owners were deducting payments made that were not being reported as income by payees. As a result, the IRS has implemented questions on all business returns which ask if the filing business had a 1099 filing requirement and whether all 1099’s have been issued. Additionally, the penalties for not filing 1099’s have been considerably increased.
So with the IRS looking so closely at Form 1099-MISC issuance, how can you prevent your business from potential issues? As good practice, any time you engage the services of new subcontractor or vendor, who is not a corporation, you should have them complete a Form W-9. This will give you all the necessary information you need in order to issue them a 1099 at year end. Secondly, you should set them up properly within your accounting software so that you can run a report which can specifically isolate the 1099 recipients and track the payments being made. Lastly, be sure to get your accounting records to your accountant timely, as 1099’s reporting nonemployee compensation must be issued to the recipients and IRS by February 1st, 2017.
While the deadline for the Forms 1099-MISC reporting nonemployee compensation has been February 1st for recipients, the IRS filing deadline had previously been March 31st. Beginning this calendar year, the IRS filing component has been moved up to be in line with the recipient deadline.
For practitioners like myself, this places a significant burden on us during the month of January. In addition to quarterly sales tax filings, quarterly payroll tax filings, Form W-2 filings and year-end closings, we now need to ensure that all Forms 1099-MISC are issued to the respective recipients and timely reported to the IRS.
As a result of this change, our firm is planning to mail a letter to all of our business clients in early December in order to prepare them for this filing obligation and ensure that we obtain their records promptly. This is yet another reason as to why your business accounting needs to be kept current and not done on an annual basis in February or March.