The 1099 is the form you send to every contractor whom you paid $600 or more in the previous calendar year.1 The most important thing to remember about 1099s is to DO THEM. They are due to recipients at the end of January, as are the government’s copies, with a cover sheet called Form 1096.
The second important thing to remember about 1099s is to obtain a tax ID—either a Social Security number (SSN) or an employer identification number (EIN)—for every contractor you pay during the year. You’ll need this number to fill out their 1099 form, and you don’t want to be stuck making a lot of calls to far-flung freelancers on January 29th. Cover yourself by requiring a W-9 from every vendor who could be eligible for a 1099, even if you don’t expect to pay them over six hundred dollars.
So who gets a 1099? Cathy Keeps Books thinks about it this way:
- No corporations of any kind.
- Except law firms and health organizations.2
- Individuals (independent contractors).
- Sole proprietors, i.e., companies comprising one individual (often, “consultants”).
- LLCs. Unless they are C-corporations or S-corporations.3
Equally important, who doesn’t get a 1099?
- Corporations (see above).
- Companies with names ending in Inc. (they are corporations).
- Companies with names ending in PC (Professional Corporation, a kind of corporation that includes attorneys, doctors, accountants, etc. Although note that lawyers ALWAYS get a 1099).
- States and governments.
Additionally, don’t report:
- Payments made with a credit card, debit card or other type of payment card. (Those companies must report all such payments themselves on a 1099-K.)
- Payments made through third parties like PayPal. (Again, such parties will report on a 1099-K.)
- Scholarships or fellowships.
- Reimbursements to employees or volunteers.
And do report:
- Travel reimbursements, unless the nonemployee submitted an expense report accounting for the individual transactions.
You can check out the official instructions here. You’ll probably be using Box 7, Non-Employee Compensation, for almost everything you report. One exception is rents, which go in Box 1.
What’s the best way to prepare 1099s? As a bookkeeper, you have multiple options. Cheapest for your client is doing them by hand with free forms from the IRS. And I do mean by hand—these are carbon-copy forms, which you must fill out, carefully separate on the perforations, and mail to your recipients and the IRS. The next step up in efficiency is to order printable forms (well in advance, please!) from Staples or some such. This is still a pain, since you have to print each form multiple times to get all the required copies. If your clients are in QuickBooks, you can use the wizard in either the online or desktop version to populate and print the forms.
But the most civilized way, in Cathy Keeps Books’s opinion, is to e-file. This process gives you pdfs of the forms that you then download and print for both your recipients and your records. You don’t have to do a 1096, and if your state participates in e-filing, the processor will send in your state forms, too. (Do you have to file your 1099s with the state? That depends on how strictly you interpret the word “have.”) For clients in QuickBooks Online, Intuit has an easy-to-use e-filing portal; you can probably e-file within QuickBooks itself too, depending on your version. The downside? E-filing costs money. The upside? Not that much money, and it save you a heck of a lot of work.
Please make sure that your “contractors” really are contractors and that their work doesn’t cross the line into anything the IRS would consider to be staff employment.
1 Meaning $600 in actual money received during the calendar year. For instance, if you posted a bill payable for Cathy Keeps Books on December 31, 2017, but didn’t pay her until January 5, 2018, that payment will not be included on her 2017 1099-MISC. To get all QuickBooksy about it, this is why you should pull your 1099 totals from the cash register and not from, e.g., the Professional Fees or Consultants expense line.
2 And, of course, companies that sold you fish for cash.
3 This right here is an excellent example of why we have a disclaimer at the bottom of every page. We’ve gone back and forth on this one, but it looks like YES, you do send 1099s to LLCs. See Legal Zoom, the Houston Chronicle, Forbes and Nolo on the subject.