If you’re a business owner, you must give a Form 1099-MISC to any independent contractors you paid $600 or more for services provided to your business during the year. Sending 1099s is not optional. They are mandatory, unless the service provider is a corporate entity. If your service provider happens to be an attorney, however, a 1099 is ALWAYS required, whether the attorney’s business is incorporated or not.
Form 1099-MISC must be provided to your recipient contract workers by January 31.
If you have a child care business or other business in the home, you should also give 1099s to any home service providers paid $600 or more during the year.
If you pay an independent contractor via a credit/debit card, PayPal, or other third-party payer, you should NOT issue a 1099. If one is required, the payment processor (bank, credit card company, etc.) will issue a Form 1099-K instead. (This has been the rule since 2011.)
Day care providers, here are some of your potential 1099 service providers: house cleaners, yard workers, music or language teachers, tutors, storytellers, and bookkeepers…..folks with special skills who were paid to provide home or business services with little direction from you. This does NOT include assistants who help care for children.
Luckily, 1099s are quite easy to prepare. If you take action at the beginning of the year, you can get the forms and prepare them yourself for free.
Consequences of not filing 1099s
What if you pay $600 or more to some service providers and you do NOT file the required 1099-MISC forms? If you are audited, the Internal Revenue Service could fine you $100, or up to $250, if they believe your failure to file the 1099 was due to intentional disregard of the law. The IRS could also try to deny the income tax deduction. However, if you can prove that you paid the amount you claim on your tax return, and show that it is a valid business expense, you are entitled to the deduction. The auditor will want the name and contact information of the service provider.
California residents: The Franchise Tax Board, unlike the IRS, MAY DISALLOW a California income tax deduction for amounts paid to a service provider if you fail to report the payments on either a Form W-2 or a Form 1099-MISC.
Getting the Necessary Forms
If you are reading this no later than about January 15, there should be time to order the forms you need directly from the Internal Revenue Service for free. (The forms are scannable and cannot be downloaded.) It should take between 7 and 14 days to receive them if you order today. You can call the IRS forms number at 800-829-3676 or you can go to this special IRS online order page for information returns. (A 1099 is a type of information return.)
If it is past January 15, I recommend that you buy some 1099 forms at a local office supply store. You can still try to get them from the IRS, but it’s getting late. If the IRS forms don’t come before January 31, you may be stuck, because office supply stores commonly run out of 1099s by then. At least, that’s what happens where I live. If you go shopping for forms, be sure to buy the 1099-MISC forms labeled “4-part continuous,” if you want to fill them out by hand. Other types of 1099 forms are sold for use with software.
When ordering forms from the IRS, request three copies of the Form 1096 Transmittal Page. Also request a minimum of three copies of Form 1099-MISC. If you are preparing more than three 1099s, order one Form 1099-MISC for each of your 1099 service providers. This is enough so that you can mess up a few forms and still be okay. You only need to prepare one final Form 1096 and, in fact, the 1099-MISC forms have two forms per page, so you’re getting more than you really need. When buying forms at the store, I generally look for the smallest package of 4-part continuous 1099-MISC forms available. The package will also include several 1096 forms.
Getting the Necessary Information
If you don’t have a service provider’s tax id number, now is the time to get it. You will need their full legal name and mailing address, too. To get this information, ask the service provider to fill out a Form W-9. (There is also a Spanish Form W-9 available.) If they refuse, refer to this advice from Tax Mama Eva Rosenberg, which includes the possibility of filing a 1099 without the contractor’s tax id number.
Get in the habit of requiring all 1099 service providers to fill out a Form W-9 when you engage them and, if possible, avoid paying them until the completed form is returned. This is the only way to ensure your ability to prepare a 1099. If certain service providers remain uncooperative, you should look elsewhere for help.
Preparing Form 1099-MISC
This is a 4-part carbonless form. Press hard so that what you write is legible all the way through.
Enter your name, address and phone number in the PAYER’S box at the top. Enter your tax id number in the PAYER’S federal id number box. This means your Employer ID Number (EIN) or your social security number. If you are a sole proprietor without an EIN, be aware that it only takes a few minutes to get an EIN from the IRS. I highly recommend that you use an EIN on your 1099s and protect the privacy of your social security number.
Enter the worker’s information in the RECIPIENT’S id number, name and address boxes. Then enter the dollar amount paid to the person during the year in box 7, labeled “nonemployee compensation.”
Fill out one 1099-MISC for each of your service providers. The form covers half of the page, so you can put two service providers’ information on each sheet.
Preparing Form 1096
This is a single sheet transmittal form. You send one Form 1096 with all of your 1099-MISC forms.
Enter your name and address in the FILER’S box at the top. Enter your name as “person to contact” and enter your phone number in the appropriate box. Include an email address or fax number if you want to.
If you have an EIN, enter it in box 1. If not, enter your social security number in box 2.
Enter the number of 1099-MISC forms you prepared in box 3. This means the number of individual 1099-MISC forms prepared, not the number of 1099-MISC pages. (Remember? There are two 1099-MISC forms on each page.)
Finally, total up the amounts shown in box 7 of all your 1099-MISC forms and enter it in box 5 on the 1096. Enter an “X” in the box for “1099-MISC,” from among all the checkbox choices shown. Sign and date the Form 1096. If you are a sole proprietor business owner (which includes most family child care providers), enter “owner” as your title.
Preparing the forms for mailing
Now it’s time to separate the carbonless pages of each Form 1099-MISC. On top is the scannable red form that goes to the IRS. Do not cut the red forms apart. Leave the full sheets intact and set them aside for now. Next comes Copy 1 (for your state tax department, if necessary–you won’t need it if you are a California resident), Copy B (for the recipient), Copy 2 (for recipient’s state taxes, if necessary) and Copy C (for the payer, which is you).
After you have separated all four of the carbonless copies, send Copy B and Copy 2 to the recipients (your workers) by January 31. Keep Copy C for your records. If possible, I recommend that you also make a copy of the red 1099-MISC for your records, because the carbonless copies are often hard to read. Make a copy of the 1096 form for your records, as well.
Put the red 1096 and the red 1099-MISC forms in a large envelope. Do not fold, staple or mutilate them! Don’t even use a paper clip. Send them flat to the Internal Revenue Service Center address for your state, as shown under “Where To File” in the 1096 instructions printed on the bottom of the form.
Mail the forms to the IRS postmarked no later than February 28. (Even if it’s a leap year.)
Here is a link to the 1099-MISC instructions for additional guidance.