1099′s. If ever there was a sore subject, this is one of them. Much has changed, and keeps on changing… and unchanging, and so it is time to get up to speed on where we are now.
HISTORY
The original 1099 rules were poorly understood, loosely followed, and barely enforced. During 2010, in the spirit of “no new taxes,” various new initiatives were devised by way of multiple pieces of legislation that had nothing to do with business taxes. In short, this entailed both additional uses for 1099′s (to begin after 2010) and the intention of heightened enforcement (to begin immediately). The ensuing uproar was heard all the way into the hallowed halls of Congress, resulting in a rollback of the additional uses. NOTE: The HEIGHTENED ENFORCEMENT continues!
For tax year 2010 (the one we all muddled through last year) many folks worked hard to comply. There were many, many mistakes. The IRS generously decided to make it a “trial” year, and rather than enforce, they merely sent out letters advising folks of their mistakes.
WHY BOTHER?
Because there are stiff penalties for failure to comply! Remember, it all started with “no new taxes.” The government needs/wants money as much as you do, and if they can’t get it in the form of taxes, they will happily take it in the form of fines and penalties. Ouch!
WHO?
Who has to send 1099′s? Businesses.
Who do they get sent to? Non-corporate service providers. This means, you only get to play the 1099 game if you…
1- pay for services (examples include but are not limited to: computer repairs, website design, rent, attorneys, bookkeepers, CPA’s, etc.)
2- totaling $600 or more for the total year (not each time, but all amounts added together)
3-and the money is going to an individual person or partnership or LLC (not a corporation)
WHAT TO DO NEXT?
Review your records to see if you’ve paid $600 or more to any service providers (remember, rent is included) and immediately get them a Form W-9. Yes, you can google it. Send it to your service provider and expect them to fill it out. Monitor their compliance because you might have to follow up.
Review the W-9′s that you get back. Did anyone mark the Corporation boxes? They don’t need a 1099. (Small mercy) Keep the form in your files.
Review the ones that say LLC! A sole-member LLC is treated as an individual, and so you need their personal name (as shown on the tax form they file) and their SSN, not the FEIN of their business. If you think it is possible they gave you their FEIN and business name, do not be shy about calling them to confirm because after all, you are the one who could get stuck with a fine for not sending a correct 1099.
Review the ones that say Individual/Sole Proprietor! These are treated as individua, too, and so you need their personal name (as shown on the tax form they file) and their SSN, not the FEIN of their business. If you think it is possible they gave you their FEIN and business name, do not be shy about calling them to confirm because after all, you are the one who could get stuck with a fine for not sending a correct 1099.
Next, get yourself some “red paper.” Some small local stores (like Lakes Office Supply in Medford Lakes) will sell individual pieces; big office stores like Staples sell packs; the IRS office in Cherry Hill will allow you to have a small quantity for free; some public libraries lay in a supply, but it goes quickly. You need FORM 1099-MISC for each vender, and 1 copy of FORM 1096 which acts as a sort of header. (The paper is actually white with red boxes that the IRS insists work well with their computers. You cannot make color copies on your printer!) You can, however, feed the paper into your printer, providing you have a program that will print the information in the proper boxes. There can be issues with lining things up, but the governments generally don’t fret this as long as it is close. Overall, it can be easier to just fill them out by hand.
Fill it all out carefully and legibly, and be sure to sign the transmittals!
Send copy B to the vendor before the end of January. (Yes, you can fold them up into a regular envelope.) Wait to see if anyone notices a mistake so you can fix it on the copies you send to the government.
Send the red pages (copy A) to the IRS, postmarked by February 29, 2012.
Does NJ need anything? Yes! Google: NJ W 3 UNC. This is the NJ transmittal, and you can fill it out online and print. Send it with copy 1 to NJ.
Other states: Some states still do not care, while others do, but this is not the place to go into it.
Keep the rest of the copies!
Of course, you could engage me to do the work for you. The advantage is that I know the ropes, and I get to file by the end of March because I have codes allowing me to file online. The disadvantage is you will have to pay me. Your choice.
WARNING #1!
What if your service provider refuses to fill out the W-9? You are in heap deep, and we should talk about this in real time. Generally speaking, you are supposed to get the W-9 before you start paying these people. This allows you to withhold taxes for them — just like employees! The federal government requires a 28% withholding, and NJ requires 7%. This information will also go on the 1099′s, and of course, the withholding money goes to the government.
WARNING #2!
You should also know that barter transactions, as well as payments of interest and dividends, require 1099 compliance, but this article is already too long.
