How to Prepare and File 1099s - Small Business CPA The Woodlands
Last week, we talked about the penalties the IRS charges for not complying with all 1099 reporting requirements. The penalties range from $30-$100 per 1099 for filing late and up to $250 per 1099 if you intentionally fail to issue them. You also run the risk of facing perjury charges which could cost you your freedom.
Filing a 1099 is a labor intensive process. Computers and QuickBooks can only do a portion of the work. There are several informational steps you will have to go through before a 1099 can be prepared.
Let's Recap.. Do I need to file a 1099-MISC?
If your business spends $600 or more for services from a business or individual contractor during a tax year, you may have to report the amount on a 1099-MISC. All types of businesses are eligible to receive a 1099. S-Corps, LLCs, LLPs, sole proprietors, etc should receive a 1099 from your business.
Below is a listing of the most common types of transactions you must issue a 1099 for your trade or business. The contractor must be an individual or partnership; payments to corporations currently do not require a 1099, except for noted below.
- Professional fees to an attorney, doctor or other professional are included, as long as they are made in the course of your trade or business. Do not issue a 1099 for payments that are for personal expenses.
- Payments to corporations are included only if they are for medical, health care, legal or fishing activities (yes, fishing!).
- Payment of $600 or more in rent for office space, machines, equipment or land in the course of your trade or business will also require a 1099-Misc if the payment was made to an individual or partnership, not a corporation.
- Payments include commissions, fees, interest, rents, royalties, annuities and any other type of compensation or income to a single recipient.
In order to issue 1099's to your vendors, you will need their Federal EIN or social security number, full legal name, and correct address. This information should be given to you on Form W-9, completed by the vendor BEFORE you pay them for any service. If you do not receive this information, the IRS states you must begin backup withholding of 28% immediately and continue until you receive the required information. If you do not you could actually become liable for any uncollected amounts!
The amounts paid to each vendor for the entire year must go on Form 1099-MISC. In theory, you will be able to get this information quickly from your accounting software. However, if your expense accounts are not properly set up for 1099 preparation, your 1099's will not be accurate. We have several clients we prepare Form 1099's for, and making sure all accounts that make up 1099 type transactions are properly mapped, is one of the first steps we have to do. If new accounts and vendors are not setup properly during the year, this process can be extremely time consuming at year end.
The amounts paid to your vendor must be listed in the appropriate box. There are 14 different boxes on a 1099-MISC, including rents (1), royalties (2), other income (3), medical/healthcare payments (6), nonemployee compensation (7), gross proceeds paid to an attorney (14), etc. You must also enter any amount withheld for federal income tax in Box 4.
Your Information & Submitting
For each 1099-MISC you prepare, you will need to include your Federal Employer ID Number, your Business Name, and your Business Address. One your prepare and print your 1099s, you will need to prepare a Form 1096 Compilation Report. This form totals all information from the 1099 forms. After checking for accuracy, please mail 1099s to your vendors by January 31st. The 1096 Compilation Report is due to the IRS by February 28th.