Okay, it’s the end of January, which means tax season is about to hit us full in the face. For those who are already way ahead of the curve and filed their taxes on January 23rd, yay you. Nicely done, now go enjoy a well-deserved break.
For the rest of us small business owners, here is a useful, easy-to-understand, humorous post about 1099s. These tend to be the form that affects us the most. And they can be confusing.
Running your own small business is a lot of work. I’ve done it for most of my working life. Taxes tend to baffle me personally, but there are a few things I know that are very important when it comes to filing mine.
I figured I can’t be the only person who wonders about the great mysteries of filing taxes, so I decided to write this post. I hope it helps you, as you try to figure out this part of being a small business owner.
First, let me state up front that I am not an accountant. I don’t answer tax questions. In fact, I ask my accountant tax questions regularly, including for this blog post. If you have questions after you read this post, I recommend you talk to an accountant or call the IRS.
That being said…
What is a 1099?
A 1099 is a tax form that you receive for certain types of income. These range from cancellation of debt and interest income to social security benefits. Each type of 1099 has its own designation. The one that concerns most small business owners is the 1099-MISC, which is used to report non-employee income.
If you’ve ever been an independent contractor or freelancer (like me) you’ve probably gotten these before. It’s a form with your information and the information of the company you worked for at the top. Then it shows a whole bunch of empty boxes, and one box filled out with how much that company paid you.
I know, it seems like a lot of work for one little box. But it makes the IRS happy, which is always in your best interests.
Your 1099 tells the IRS that you were paid a certain amount, usually “non-employee compensation.” There are a bunch of other possible reasons you could receive a 1099-MISC. For instance, maybe you earned rental income or royalties. Or you received a “golden parachute” payout, or punitive damages award from a court case.
If you want more information on everything a 1099-MISC can be used for, I recommend checking out the IRS instructions for filling one out.
Who Should Get a 1099-MISC?
If you worked as an independent contractor or freelancer for a company and that company paid you $600 or more, you should receive a 1099-MISC from that business. Yes, this is true, even if that company is another solopreneur or one-person small business, like you.
By the way, that means if you worked with a fellow small business person and you paid them $600 or more, you need to fill out and send them a 1099-MISC.
Why do I mention this? Because we’re small business owners. We have a heck of a lot of other stuff on our plates and sometimes it doesn’t occur to us that we need to deal with these forms. We do. It’s good practice for our own businesses, and it’s helpful to everyone we work with, to make sure we’re all on the up-and-up when it comes to reporting income to the IRS.
I’ve filled out and sent 1099s for various companies I’ve owned. It’s not that complicated.
Once you have the forms, you fill in your business’s information at the top, along with your social security number or employee identification number (EIN). You do the same for the person you paid. Then you enter how much you paid that person in box 7, titled “non-employee compensation.”
You submit Copy A of your 1099-MISC, along with form 1096, to the IRS. Form 1096 is a summary of all the 1099s you sent to your contractors.
You mail copy B to your contractor.
You keep copy C for your own records.
If you use programs like Quickbooks and TurboTax, Intuit offers an online service where you can fill out and print, or email, your 1099s to your contractors and freelancers, then submit them to the IRS, along with your 1096.
Are there other factors involved? Probably. This has been my experience in the past. The IRS updates forms and the rules to use them every year. Again, if you have questions, I recommend contacting an accountant. Not only will they be able to answer your questions, they can fill out and submit the 1099s for you.
What If I Didn’t Get a 1099 From One of My Clients?
An excellent question, and the very one I asked my accountant today. Here is his response:
“It’s the responsibility of the client paying you to obtain the information necessary (via Form W-9) to prepare and file a Form 1099 for certain payments made to you. You have no responsibility for making sure that a Form 1099 is issued to you and there is no potential penalty to you for not receiving one.
That said, the mere fact that you didn’t receive a Form 1099 for any income received does not relieve you of the responsibility of properly reporting and paying tax on that income. The same holds true for both domestic and foreign clients.”
To translate what Jim said into non-accountant:
If you’re supposed to send someone a 1099, you have to ask them to fill out a W-9 form. The W-9 gives you all the information you need to issue a 1099-MISC to them. You can find the W-9 form here.
If you’re supposed to get a 1099-MISC from someone, and they don’t send it, you’re not in trouble if you file your taxes without their 1099 form.
However, you do have to report, and pay taxes on, your income, whether you received a 1099 or not.
Did This Blog Post Help?
I know I’m not an expert on taxes. That’s part of the reason I wrote this post. I wanted to put an important part of being a small business owner into as simple a form as possible.
I’m thinking of writing more blog posts about the nitty-gritty of running your small business. Stuff like, how to set up your website, or how to choose and set up your email service provider. Really basic stuff that a lot of other blogs don’t cover, because they’re not terribly glamorous.
If topics like this interest you, please tell me what other topics you’d like me to write about in the comments.