February 2, 2008

Dear _FIRST_NAME,

Do you need to send out 1099s this year?

Are you wondering why I am asking this when it's February already? Isn't it too late?

Short answer: "No, it's not."

It's not too late

Even though 1099s are supposed to be sent to recipients no later than January 31, the true deadline is February 28. That is the deadline for mailing your 1099s to the IRS.

As a business owner, you must give a Form 1099-MISC to any independent contractors you paid $600 or more for services provided to your business during 2007. But don't bother if the contractor's business is incorporated. An exception applies in that case.

You may not think you hired any independent contractors, but what about your lawn service? Your window washer? Your handy man? The guy who shovels your driveway? (Not so common in California, but still...)

These folks usually don't provide services directly to your business, but they do indirectly. You deduct a percentage of what you pay them on your tax return.

Giving 1099s to home service providers

According to Tom Copeland, of the Redleaf National Institute, providers should give 1099s to home service providers paid $600 or more during the year.

If this is news to you, it was news to me, too, when I first corresponded with Tom on this subject about a year ago. Tom believes that this is the best practice to follow and the best way to safeguard your tax deduction.

For second opinion, I recently brought this issue to the attention of "TaxMama" Eva Rosenberg. She agrees with Tom:

From the standpoint of the compliance audits IRS is doing now, I can see an aggressive auditor disallowing a deduction because
there was no 1099 or W-2. And frankly, if you were to appeal, you'd probably lose - since you're taking these expenses (even if
only part of the expense) as a business deduction.

IRS wants to close that tax gap. And these maintenance-type workers are often a big part of the unreported economy.

Great! More paperwork.

Let's not panic, but rather consider our options.

I myself have not given a 1099 to my house cleaning service in all the years I have been using them. I am thinking of changing that, however. Maybe for 2007 and maybe for 2008. I'm not sure yet.

As TaxMama points out above, the IRS is in a "compliance mode" and aiming to reduce the "tax gap." These are code words for auditing more and grabbing more of our tax dollars. The tax gap is the difference between what taxpayers are paying and what the IRS believes we should be paying.

The potential cost of doing nothing

An aggressive auditor could disallow the portion of my house cleaning costs deducted as a business expense on my home office form. I would immediately owe additional income and self-employment tax, plus penalties and interest.

The final bill would depend on the size of my original house cleaning deduction. Considering the size of my home office, losing this deduction could easily cost me $150. Closer to $300 if I had the home office percentage of a typical day care provider (30-35%). Even more than that for a provider with a higher time/space percentage.

1099s are easy

Or are they?

The good part is that 1099-MISC forms are not at all complicated or expensive to prepare. I am confident that you will agree and perhaps you've already prepared some yourself. It takes only a few minutes to fill out a 1099-MISC and the 1096 transmittal form and you can get the forms free from the IRS.

The real problem isn't filling out the forms, is it? It's getting your service worker's tax id number and address information. Some workers insist on being paid in cash. In that case, you do the math (or have your tax pro do it for you) to see how much it would cost you to lose the deduction in an audit. Then you ask yourself if it's worth continuing to use the person's services or if you are better off looking for someone else.

Don't forget direct service providers

Most workers providing services directly to your business are your employees, but double check to see if you may have hired a tutor, puppeteer, storyteller or other professional activity-provider. You may also occasionally hire someone to provide substitute child care services. You should definitely give these folks a 1099-MISC if they were paid $600 or more during the year. Direct (100%) business expenses give you the biggest tax savings and they're well worth protecting.

Observe the situation carefully if you hire a substitute caregiver. To be an independent contractor, such a person should advertise to the public, give you a tax id number, provide services to multiple providers, and have a business contract for you to sign. This is rare. In general, the caregivers you hire will be considered your employees.

Ready to file a 1099-MISC?

Here's what you do.

Immediately call the IRS forms number at 800-829-3676. Have them send you 5 copies of Form 1096 and 10 copies of Form 1099-MISC. Ten copies of the MISC form will meet probably any day care provider's needs and then some, so you could order less. I always order extras, though, so that I can mess up one or two forms and still be okay. (Each 1099-MISC you order actually has two forms on the page.)

You need to call immediately because it will take 7-14 days for the forms to arrive. These forms cannot be downloaded from the Internet because they are special, red, scannable forms. There's still time to file 1099s for 2007 if you act now.

You can also buy 1099 forms at your local office supply store. But why do that when you can get them for free? Also, I find that the stores tend to run out of forms around the end of January. If you do go shopping for forms, be sure to buy the 1099-MISC forms labeled "4-part continuous," so that you can fill them out by hand. (Other types of 1099 forms are sold for use with software.) A few 1096 forms will be included in the package.

Talk to your service providers

Next call your service providers. Let them know that you will be sending them a 1099 for 2007 and apologize for it being late. If possible, tell them how much income will be shown on the form. That way, the delay in receiving your form will not hold up their tax preparation.

If you don't have the service provider's tax id number, now is the time to get it. Get their full legal name and mailing address, too. If the worker refuses to cooperate, you should document this in your records. You should also send them a Form W-9, since that's the official way to request someone's tax id number. Document sending the W-9, too.

Such documentation will help to protect your deduction in case you can't prepare a 1099 and you later get audited. It won't help you if you continue to hire the person year after year, however. So decide how much it's worth to you and look for a new service provider if you want to be able to prepare a 1099 next year. Have the new worker fill out Form W-9 right when you hire them.

Tom Copeland is coming to town! See below for details.

Don't miss Tom Copeland's workshops next week in Fremont and Santa Rosa; later this month in Hayward, Dublin and Auburn.

If you live in these areas, be sure to take the opportunity to attend a workshop given by Tom Copeland. In my book, he's not to be missed. There's always more to learn and Tom is a knowledgeable, entertaining speaker.

Tom gives workshops all over the country, but relatively few in any given local area. A tireless advocate for family child care providers, he has published many Redleaf Press books and other resources. If Tom's not scheduled where you live, have your local provider association submit a training request.

Workshop details:

Santa Rosa: Wednesday, February 6 from 6:30pm to 9:30pm. The topic is record keeping and taxes. To sign up or for more information, contact Sheila Whipple, swhipple@sonoma4cs.org or 707-544-3077 x156.

Fremont: Saturday, February 9 from 8:30am to 12:30pm. Topics include record keeping and taxes, money management and retirement. To sign up or for more information, contact Pam Buckholz, pamb@4c-alameda.org or 510-584-3114.

Hayward: Monday, February 11 from 6:30pm to 9:30pm. The topic is marketing. Again, contact Pam Buckholz, pamb@4c-alameda.org or 510-584-3114, if you are interested.

Auburn: Saturday, February 16 from 9:00am to 1:00pm. Topics include record keeping and taxes, reducing risks, money management and retirement. Contact Darcy Roenspie, droenspie@placercoe.k12.ca.us
or 530-745-1455.

Dublin: Saturday, February 23 from 8:30am to 12:45pm. Topics include record keeping and taxes, money management and retirement. Contact Donnamarie Fuller, dfuller@childcarelinks.org or 925-417-8733.

Other upcoming California locations:

Bakersfield: Saturday, March 1 from 9:00am to 4:00pm. Topics include record keeping and taxes, contracts and policies, marketing and reducing risks. Contact Pat Barron, pabarron@kern.org or 661-861-5308.

San Jose: Saturday, April 26 from 8:45am to 4:15pm. Topics include money management and retirement, contracts and policies and others to be announced. Contact Bonnie Hasson at BonHas@aol.com.

To check workshop locations in other states and for further information,
view Tom's complete training schedule on the Redleaf Institute website.

The nitty gritty of dealing with 1099s

1099s are a snap to prepare, but here's a step by step.

Form 1099-MISC

This is a 4-part carbonless form. Press hard so that what you write is legible all the way through.

Enter your name, address and phone number is the PAYER'S box at the top. Enter your tax id number (EIN or social security number) in the PAYER'S federal id number box. Enter the worker's information in the RECIPIENT'S id number, name and address boxes.

That's about it. All that's left to do is enter the dollar amount paid to the person during 2007 in box 7, labeled "nonemployee compensation."

Fill out a 1099-MISC for each of your service providers.

Form 1096

This is a single sheet transmittal form. You send one 1096 with however many 1099-MISC forms you have.

Enter your name and address in the FILER'S box at the top. Enter your name as "person to contact" and enter your phone number in the appropriate box. Include an email address or fax number if you want to.

If you have an EIN, enter it in box 1. If not, enter your social security number in box 2. Remember that it only takes a few minutes to get an EIN using the IRS EIN Online Application.

Enter the number of 1099-MISC forms you prepared in box 3. This means the number of individual 1099-MISC forms prepared, not the number of 1099-MISC pages. (Remember? There are two 1099-MISC forms on each page.)

Finally, total up the amounts shown in box 7 of all your 1099-MISC forms and enter it in box 5 on the 1096. Enter an "X" in the box for "1099-MISC," from among all the checkbox choices shown. Sign and date the Form 1096 and enter "owner" as your title.

Preparing the forms for mailing

Now it's time to separate the four parts of each 1099-MISC form. Do not cut the top red forms apart. Set them aside.

Separate all the carbonless copies. Send Copy B to the recipients (your workers). Keep the other copies with your records. If they are at all hard to read, I suggest that you make a copy of the red 1099-MISC for your records, but this should not be necessary. It is a good idea to make a copy of the 1096 form for your records, however.

Put the red 1096 and the red 1099-MISC forms in a large envelope. Do not fold, staple or mutilate them! Don't even use a paper clip. Send them flat to the Internal Revenue Service Center address for your state, as shown under "Where To File" in the 1096 instructions printed on the bottom of the form.

The forms must be postmarked no later than February 28. You'd think they'd give us an extra day for leap year, but the instructions say the 28th.

Last words

I hope this information has been valuable food for thought and useful for any of you who definitely plan to submit 1099s for 2007

Here is a link to the 1099-MISC instructions, for additional guidance.

If it's all just more than you wish to deal with right now, contact me for help.

There's still time, but get to it right away!

Sincerely,