How to Know When to Issue a 1099-MISC
As a nation that thrives on entrepreneurship and the free market paradigm, millions of individuals and business entities in the United States are required to file certain tax forms each year to the Internal Revenue Service (IRS). One of the most common forms filed by self-employed individuals and business owners is the 1099-MISC, which is used by service providers to report miscellaneous income earned.
The basic rule of thumb for making a determination on whether you must file a 1099-MISC or not is as follows: If you, as a business taxpayer, paid $600 or more to an individual or to a company for their services within a calendar year, you are required to issue a 1099-MISC Form so that they can turn around and include it in their annual tax filing. Whether the payment was made as a lump sum or in increments is of no consequence; as long as $600 or more were paid between January 1st and December 31st, a 1099-MISC Form must be issued.
An example of a 1099-MISC situation is as follows: A self-employed architect contracts a Web design and search engine optimization firm to develop her website in early January. The invoice comes out to $601 and the work is completed in April. Being short on cash, the architect proposes to pay $300 in May, $150 in June and the outstanding balance by the end of July. This situation calls for a 1099-MISC to be generated and sent to the Web developer by January 31st.
Even if the architect operates as the sole proprietor of a non-profit business, she is still subject to IRS rules with regard to the issuance of 1099-MISC Forms. Aside from professional services, this form must be issued when fringe benefits are paid to contractors or when rent is paid for equipment or office space. If the architect is sued and ends up paying $600 or more in punitive damages, she must issue a 1099-MISC. The same goes for royalties that she paid during a calendar year.
To make things easier, the architect could ask the Web design firm to complete a W-9 Form as a condition of tendering payment. Failure to issue a Form 1099-MISC could result in penalties of up to 50 percent of the amount that should have been noted on the form; for this reason, it helps to retain the services of a tax filing service or a CPA.