By: Anjum Tunuli, Chief Tax Officer
One area we often see startups struggle with is managing their tax filing requirements relating to contractors and other non-employees. With that in mind, here are some quick pointers on 1099s, specifically the who, what, when, and how, to help you gear up for tax season.
What is Form 1099…And Why Is It Important?
Form 1099, also called an “information return,” is the tax form used to report compensation paid to non-employees. Businesses are required to file Form 1099-MISC for any vendor, independent contractor, consultant, or service provider, including attorneys who performed work or services for them totaling $600 or more during the current tax year. There is one exception; payments you make to corporations generally do not have to be reported on Form-1099.
There are several different types of 1099 you might be required to file, depending on the nature of the earnings (or payments) you are reporting. For instance, if your business receives interest on debt, you could have to file Form 1099-INT. The 1099-INT filing requirement kicks in if you received more than $600 of interest income or you made more than $600 in interest payments. So for example, if your startup issued certain types of notes to founders, you might have to report interest received on those notes via Form 1099-INT.
When Do I File Form 1099?
You must send out 1099s to non-employees you’ve done business with by January 31st of each year, unless that date falls on a weekend. It’s a good idea to start preparing for this early, to allow yourself plenty of time to find out about and correct any errors in advance of the filing deadline. In most cases, January 31st is also the due date for filing your 1099s with the IRS.
How do I File?
The first step in making sure you’re compliant with your 1099 filing obligations is to have each contractor you do business with sign a Form W-9 during the onboarding process, before they perform work for you. This helps avoid stressful end of year scrambles to track down missing documentation. (Among other crucial details, Form W-9 captures the recipient’s legal name and taxpayer identification number.)
What Happens If You Miss Your Filing Date?
The IRS imposes steep penalties for failing to provide 1099 forms to required recipients. You can also be hit with penalties for missing your deadline and for filing incorrect forms. Penalties depend on how late your filing is and the reasons for the delay and/or errors in your filing. While there are limited exceptions and the IRS also caps the maximum amount for small businesses, penalties can range from $50 to $270 per incident (i.e., for each Form 1099 not timely filed).
Given all the record-keeping involved, multiple filing deadlines, and differing requirements at the state level, you’ll likely save time, money, and hassle by finding a software solution to automate at least some parts of this process — and partnering with a tax professional. Depending on where your startup is in its lifecycle, you might also benefit from bringing an expert, whether a full-fledged CFO, an outsourced one, or a part-time accountant, onboard. And one final note, always seek advice from a tax professional for guidance specific to your situation.
Anjum Tunuli is Early Growth Financial Services’ (EGFS) Chief Tax Officer. An accomplished tax executive, with over fifteen years of experience, he works with successful small to mid-sized companies and their owners. Tunuli also has a very successful track record representing taxpayers before various taxing agencies and helping clients understand the full financial impact of tax planning on their operations.
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