Understanding the 1099-MISC Tax Form
 By Lee S. Shaffer

If you’re newly self-employed, you need to get to know the federal 1099-MISC tax form. The 1099 is to self-employment what a W-2 is to employees. The form reports income that self-employed individuals receive each year. Every company and individual that pays you more than $600 during the year is required to report that payment on a 1099. One copy of the form is sent to you. The other is sent to the IRS. In addition, if your small business pays an individual more than $600 a year for services, you’re required to issue a 1099-MISC to that individual and to send a copy to the IRS. There is one exception. If the individual is incorporated, you don’t have to issue a 1099. Here’s a breakdown on getting and giving 1099 forms.

Getting 1099-MISC forms
Each company or individual that pays you more than $600 during the year must send you a 1099 form by Jan. 31 of the following year. The IRS will receive a copy of the 1099.

Your first action is to review the 1099 for accuracy. Make sure the dollar figure it reports matches your own records. Don’t assume that the 1099 is correct. Many aren’t.

If you find a mistake, contact your client immediately and request a corrected 1099. Your client should also send a copy of the corrected 1099 to the IRS. Just in case that doesn’t happen, keep records of your conversations and correspondence with your client. You may need those records to prove your case to the IRS.

In some instances, a client might issue you a 1099 that includes reimbursements for expenses as well as income. For example, let’s assume you paint murals for a living. You paint a wall mural for the lobby of a business and are paid $1,000 for the job. You also buy all of the paint needed for the project, which costs you $100. When your 1099 arrives, it reports that you were paid $1,100.

Don’t panic. Simply report the $1,100 as income on your business tax return. Then take the legitimate deduction for expenses, which includes the $100 worth of paint you purchased for the project. Deducting your expenses from the income makes it all come out even in the end.

But what if you never receive a 1099 from the client? Report the income anyway. And take every deduction you’re entitled to. Not reporting income you earn is tax fraud, and it’s considered a felony. Best not to go there.

Giving 1099-MISC forms
When you subcontract work to individuals and pay them $600 or more during the year, you’re required to send each of them a 1099-MISC tax form. You must also send copies of each 1099 to the IRS. You don’t have to send 1099s to contractors who are incorporated.

Send 1099s for the previous year to contractors no later than Jan. 31. Send copies of the 1099s to the IRS no later than Feb. 28. The penalties for not filing 1099s are steep: $50 for each 1099-MISC not given to a contractor and $50 for each copy not filed with the IRS.

To ensure accuracy of the 1099s you must issue, get contractor information before you ever make a payment. You can use IRS Form W-9 to get the information you need. Have the contractor fill out the form, which requires the person’s Social Security number, business name and mailing address. The contractor should return the W-9 to you.

Keep each contractor’s W-9 on file. In January, use the information on the W-9, along with the amount of money you paid, to complete the 1099 for the contractor. If you don’t have a W-9 on file, you’re required to track down the contractor for his or her address and Social Security number. It can be a time-consuming hassle. Avoid it by insisting on a W-9.

If you send a 1099-MISC to contractor, and the form is returned to you as undeliverable, still send a copy to the IRS. Also, keep the returned 1099, the mailing envelope and the W-9 you have on file. These items prove you attempted to issue the 1099.

You can download Form W-9 and its instructions from the IRS Web site, www.irs.gov. You must call the IRS at 800-TAX-FORM to request 1099-MISC forms

(Posted August 2004)

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