What Small Business Owners Should Know About 1099s

As a busy business owner, chances are you may need to hire a contractor at some point. We're all for it -- contractors are specialized professionals who can help take over an area of your business so you can focus on what you do best. If you hire contractors, you'll need to know the ins and outs of 1099s.

If you pay more than $600 to a contractor, you must provide a 1099-MISC. Because many contractors are sole proprietors, the IRS pays special attention to them to make sure they get their fair share.  Failure to file these will result in fines. As of 2017, the IRS changed the filing deadline for 1099s. Previously, employers had until the end of February for paper filings and the end of March for electronic filings. Now all filings, electronic and paper, are due by January 31. 

Without reasonable cause, late filings or filings with missing information will be subject to penalties. They are:

• $50 per information return for returns filed correctly within 30 days after the due date, with a maximum penalty of $500,000 per year (or $175,000 for certain small businesses);
• $100 per information return for returns filed more than 30 days after the due date, but by August 1, with a maximum penalty of $1.5 million per year ($500,000 for certain small businesses); and
• $250 per information return for returns filed after August 1, or not filed at all, with a maximum penalty of $3 million per year ($1 million for some small businesses).

At Anderson Folkoff, we recommend our small business clients get a signed contract, a non-disclosure agreement, and a W9 from any contractors they hire before they send out the first payment for services. This ensures that you have everything you need when it comes time to file the 1099-MISC. 

Preparing 1099s can take time, but fortunately, most accounting and payroll systems will handle most of the work for you, including delivering an electronic version to your contractors (no snail mail!). Making the most of these tools will keep you focused on growing your business.