Why Would I Have to Send a 1099 to Someone?
(Updated for January 2021)
IF
1 – You have a business and business expenses AND
2 – One of your expenses is paying a person (or people) to do work for you AND
3 – These people are NOT your employees AND
4 – These people are not a corporation AND
5 – You paid any of these people over $600 total during the year
THEN you need to send these people a 1099-NEC (new for January 2021)
What is a 1099?
A form 1099 is not a nice memo on a pretty form telling someone how much you paid them. The 1099 is an informational tax form, and it gets filed with the IRS. What you give your workers is merely a copy of what you sent the IRS.
Why is this even a ‘thing’? It’s “kicking the (tax) can down the road” with your business income. Here’s an example of a painting contractor: He gets the big contracts and handles the money. He hires independent painters to carry out the work. He brings in $500,000 and sends out 1099s for $100,000 each to 4 painters. He’s telling the IRS that he is not paying taxes on $400,000 and here’s why: I gave it to these guys. It’s their problem now. Here’s their information. Go tax them on it.
One of the painters, in addition to his other expenses (like paint), pays another sub contactor to help with the work. He gives him a 1099 for $25,000. Again, the 1099 is him kicking the ‘tax can’ down the road. $25,000 of the $100,000 is no longer the painter’s tax problem, it’s his helper’s. Here’s his 1099. Go tax him.
For other expenses (like paint), you get a receipt for proof of payment. When you pay people, the only proof you have is sending the 1099. If you don’t send 1099s, the IRS can deny your deduction and you get to pay taxes on it. 1099s are not an option or a nice memo. It’s the law.
Who works for you that isn’t your employee? your lawn guy or cleaning person, outside services or suppliers, sub-contractors, your bookkeeper….
When is it due? Form 1099-NEC need to be FILED by January 31. (This is not the day to send it to your accountant.)
How do I file? Don’t waste your cash on pre-made forms that are “on sale” at the office store. They are not necessary and expensive. The IRS wants everything e-filed anyway. I’ve had a lot of trouble with mailed-in paper forms that people filed on their own. You can file online if you want to do it yourself (I recommend Zenwork). Or an accountant like me can file electronically for you.
What info do I need for a 1099? How do I get it? You will need their legal name (or business name), their mailing address, and their social security number or ITIN or EIN. You ask for this by giving them a form W-9 and asking them to fill it out. If they are incorporated, they can advise you of that checking the box that says they are a corporation. You also need to total what you paid them during the year.
Now, let’s look at some problems that I see all the time:
First, Mimzy. “I don’t want to give Mimzy a 1099 because (it’ll mess with her disability, she owes back child support, she’ll have to pay taxes on it, the IRS is already after her, she’s not here legally).”
Pick an excuse. I’ve heard them all a zillion times. So, what do you do when you have that person you just don’t want to 1099?
First, I can’t decide for you if you should put Mimzy’s interests over your own. If you do, that is your decision. But in the eye of the law, Mimzy’s problems are Mimzy’s problems, not yours, and 1099 compliance is your problem, not Mimzy’s.
Second, if you don’t give Mimzy a 1099, you cannot deduct what you paid her. The amount you paid her is part of your taxable income and is a personal gift to her.
If you deduct what you paid her on your return anyway, you may get audited. If you do, I can represent you, but I have no defense for this. I will have to concede that you didn’t comply. You will wind up paying the taxes on what you paid her.
Finally, is Mimzy sure about her position? Or just scared to be on the radar? Is she aware of the law? If she owes back taxes and isn’t making money, she may qualify for non-collectible status. Child support can’t garnish beyond a minimum standard of living. Undocumented persons can get an ITIN and pay taxes. Many people on disability/Social Security/food stamps, etc. can make SOME money without losing their benefits. Also, making SOME from earnings will allow you to get an earned income credit in many cases.
So my advice is this: If you have a Mimzy, let me know. Maybe I can get you in compliance and let Mimzy stop living a life of fear.
Now, let’s look at Gilbert. Gilbert says, “I don’t want to give that guy my social security number. I (mow his grass, fix his website, update his social media, do his taxes), and he pays me, but I wouldn’t put it past him to steal my identity. I ain’t giving my social to nobody.”
Gilbert should get an Employer Identification Number (EIN). The IRS will have your SSN nice and safe in their files and you can give your EIN to your clients and not have to worry about giving out your SSN. They are free online, and anyone can get one for their contract work or business. Click here to go to the IRS website to learn more.
But what if Gilbert doesn’t give you any info? What if Gilbert refuses to give you any info after you already paid him over $600? What do you do then?
Well, Gilbert often has some of Mimzy’s money problems, from my experience. I can probably help Gilbert, too, so tell him to contact me. Meanwhile, you still need to comply with the law.
A Form W-9 is a declaration that the person is not subject to backup withholding. If he refuses to comply with the law by giving you his information, he is subject to backup withholding. What’s backup withholding? It is where you hold back 25% of what you are going to pay Gilbert and send it to the IRS on his behalf. Gilbert can then file a tax return to (possibly) get it back from them. If you want take what you paid Gilbert as a business expense, and you want to comply with the law, and he is refusing to give you a tax ID number, you need to start holding back 25% of his pay and sending it to the IRS with as much information as you have on him.
At this point it usually gets ugly and you lose Gilbert as a worker and a friend. But consider this, people who balk at getting a 1099 are saying they don’t want to pay taxes and they want YOU to pay their share for them instead. Why should you pay their taxes? They aren’t your employee. Or your child. No worker is worth losing your business.
Best Practice
1 – ALWAYS get their tax information on a W9 before you pay anyone that 600th dollar.
2 – Get your bookkeeping in line and get your contractor totals done ASAP so you can file your 1099s on time by January 31.
Like this post? Check out more from Grass Roots Taxes:
Employee or Contractor? How to Tell the Difference
What’s all this stuff taken out of my check?
