For most businesses, it can be challenging to navigate the ever-changing IRS tax laws. Some of the most confusing laws pertain to self-employed income reporting and the related requirements for issuing Form 1099-MISC.
Form 1099-MISC is issued to a subcontractor or business and reports the income they received for services performed during the year. It is important to note that only services performed, not goods purchased, are included on Form 1099-MISC.
Employees vs. Subcontractors
The first step – before an individual performs any services for your business – is to make the distinction between an employee and a subcontractor. The IRS’s general rule is as follows: if you control the when, how, and what in regards to an individual’s duties and pay structure, they are considered an employee.
- If it is determined that the individual is an employee, you will issue them a W-2 for wages (instead of a 1099-MISC) and should be collecting and remitting payroll taxes on their behalf.
- If instead it is determined that the individual is a subcontractor, you will issue a 1099-MISC for their services based on the information below. Refer to the IRS website, Independent Contractor (Self-Employed) or Employee?
If you are still unsure whether an individual should be classified as an employee or a subcontractor, consider using IRS Form SS-8. An employer can submit this form to the IRS for an official determination regarding whether or not an individual is an employee or a subcontractor. The downfall of this solution is that it will take at least six months to receive such a determination. If a six-month waiting period to determine a classification is not feasible, consider contacting a trusted CPA firm or tax professional for their expertise.
Following are general guidelines for determining if a 1099-MISC should be issued to either an individual or business:
- They are not an employee
- They have performed a service
- The compensation received for the service they performed exceeds $600
A few examples of services are:
- Subcontract labor
- Prizes and awards
- Crop insurance proceeds
- Medical and healthcare payments
- Payments to an attorney
- Royalties or broker payments that exceed $10
There are some exceptions to the above guidelines. For example, if a business is incorporated, then a 1099-MISC should not be issued to them regardless of the amount paid for services. It is a good practice to send all potential 1099-MISC recipients a Form W-9 to acquire the information needed to properly file the required 1099-MISC forms. Form W-9 is used to request a taxpayer identification number and certifications along with contact information. This form should be requested at the time the service is performed and can be prepared and stored either electronically or on paper.
1099-MISC forms are required to be sent to the IRS and the individual or business who provided the services no later than January 31 for the previous calendar year. This deadline is intended to ensure that the 1099-MISC recipient ultimately reports the income they received for services provided on their annual income tax returns.
For information on where to file or how to electronically file your forms 1099-MISC, refer to the IRS instructions on information reporting (General Instructions for Certain Information Returns).
Form 1099-MISC can be complicated. For more information, please contact one of our advisors.