With 2017 fast coming to an end, it’s time to start preparing for 1099 filings – many of our clients struggle with understanding who to issue Forms 1099 for. Generally speaking, all persons or businesses providing business services who are not paid via payroll need a 1099. The definition of business service payments is quite broad, and includes payments made for prizes and awards, rents, and other income. The following exceptions apply:
- Payments for physical goods do not require a 1099 – the requirement applies to payments made for services only.
- If you paid less than $600 in aggregate to the provider in the calendar year, no 1099 is required.
- Services provided by a tax exempt organization, C-Corp or S-Corp, including LLC’s taxed as S-Corps, are excluded except:
- Medical and health care payments
- Attorney payments
- Payments in lieu of dividends or tax exempt interest
- Services provided for personal (non-business) services such as home remodels do not require a 1099; for example, a contractor who remodeled an office space for more than $600 would require a 1099 whereas a contractor who remodeled the business owner’s personal home would not require one.
Always get a W-9 from service providers to help you identify whether you need to file a 1099 for them. It helps to get this information up front when contracting with the provider as opposed to waiting until year end to avoid issues with obtaining a W-9 at crunch time.
As many of our clients finance their businesses via convertible debt, it’s also important to note that any accrued interest in excess of $10 converted to equity during the year is considered income to the investor and must be reported via a Form 1099-INT. Similarly to the above, interest converted on debt issued by C-Corps or S-Corps do not require a 1099.
If you’re still not sure whether you need to file a 1099, it’s always best to err on the side of being conservative and filing a 1099. There are no penalties for filing an unrequired 1099, though on the flip side, penalties for not filing a required 1099 or late filing can be hefty. Late filing penalties start at $50 per 1099 and go up to $260 depending on when the filing was ultimately completed. If you neglect to send the 1099 altogether to either the IRS or the service provider, the penalty is increased to $530 per form or 10% of the amount required to be reported on the return, whichever is greater, ouch!
Agility can assist with determining filing qualification as well as the filings themselves. The filing deadline for 2017 1099’s is January 31, 2018. This date applies to both the IRS filing requirement and providing the form to the service provider. It’s always best to provide the 1099’s to your service providers a bit ahead of the deadline to allow for corrections as needed prior to January 31.