Come the first month of the year, every employee in your company must receive a W-2 form with which to file their own tax return. However, what do you do for an independent contractor and his/her earned wages? According to the IRS, “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” If you have hired workers classified as independent contractors, they must receive a 1099 form reporting their income if they were paid more than $600 during the tax year.
There are actually 16 different 1099 forms. Thankfully, only a few are needed by a small business accountant at tax time.
- 1099-MISC: Use this form for any vendors and independent contractors to whom you pay income.
- 1099-MSA: Use this form if your business offers an Archer Medical Savings Account program.
- 1099-R: Use this form if an employee leaves the company and withdraws his/her qualified retirement plan money. It doesn’t matter the purpose of the withdrawal. It can be because he is retiring or to put the money into an IRA. If he withdraws his retirement money then this form is used.
Like W-2 forms, 1099s must be handed out by January 31. However, you don’t have to file them with the IRS until February 28. The IRS compares the forms your business sends in with those reported by the contractors and vendors on their own tax returns. This creates a checks and balance system to keep everyone honest.
Make sure you have three copies of the 1099 form. Obviously, one is given to the vendor or independent contractor. The second one is sent to the IRS with Form 1096 which is the “Annual Summary and Transmittal of U.S. Information Returns.” The third is kept on record in a company file.