If you're a business owner (or landlord), you must give a Form 1099-MISC to any independent contractors you paid $600 or more for services provided to your business (or rental property) during the year. And you must do this by January 31. If it's February already, don't despair, follow these special February instructions immediately. If you have a home office for tax purposes, I recommend that you also give 1099s to any home service providers paid $600 or more. Sending 1099s is not optional. They are mandatory, unless the service provider is a corporate entity. If your service provider happens to be an attorney, however, then a 1099 is always required, whether the attorney's business is incorporated or not. Preparing and filing a 1099-MISC protects your business tax deduction. If you neglect to prepare a 1099 and later get audited, your deduction of the fees paid to the service provider will automatically be disallowed. That's a potentially hefty and immediate increase in tax for you, plus interest and penalties. Important: 1099s cannot be used for workers who should properly be treated as your employees (and note that day care workers are almost always employees). You must provide them with a Form W-2 instead. Refer to the IRS website for help in determining how to treat your workers: Independent Contractors vs Employees. If you need payroll forms guidance, refer to my Small Business Payroll Tax Guide. To find out how easy it is to prepare your own 1099-MISC forms, read on. ... Getting the Necessary Forms If you are reading this no later than about January 15, you should have time to order the forms you need directly from the Internal Revenue Service for free. It should take between 7 and 14 days to receive them if you order today. You can call the IRS forms number at 800-829-3676 or you can go to this special online page for ordering information and employer returns. (A 1099 is a type of information return.) The forms cannot be downloaded from the Internet because they are special, red, scannable forms. If it is past January 15, I recommend that you buy some 1099 forms at a local office supply store. You can still try to get them from the IRS, but it's getting late. If the IRS forms don't come before January 31, you may be stuck, because office supply stores commonly run out of 1099s by then. At least, that's what happens where I live. 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. Before ordering or shopping, you must determine how many 1099-MISC forms you need to send--one for each service provider paid $600 or more. If you order from the IRS, request three copies of Form 1096, plus one copy of Form 1099-MISC for each of your 1099 service providers. This is enough so that you can mess up a few forms and still be okay. You only need to prepare one final Form 1096 and, in fact, the 1099-MISC forms have two forms per page, so you're getting twice as many as you really need. If you buy the forms at the store, you can generally just look for the smallest package of 4-part continuous 1099-MISC forms available (or enough for all your service providers). The package will also include several 1096 forms. Getting the Necessary Information If you don't have a service provider's tax id number, now is the time to get it. You will need their full legal name and mailing address, too. You get this information by asking the service provider to fill out a Form W-9. If the worker refuses to cooperate, you should document this in your records. Such documentation may help to protect your deduction in case you can't prepare a 1099 and you later get audited, but don't count on it. You can also check out Tax Mama Eva Rosenberg's advice regarding what to do when a contractor refuses to provide a tax id number. Get in the habit of requiring all 1099 service providers to fill out a Form W-9 when you hire them and, if possible, avoid paying them until the completed form is returned. This is the only way to ensure your business deduction. If certain service providers remain uncooperative, you need to look elsewhere for help. (There is also a Spanish language version of Form W-9 available.) Preparing 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 in the PAYER'S box at the top. Enter your tax id number in the PAYER'S federal id number box. This means your Employer ID Number (EIN) or your social security number. If you are a sole proprietor without an EIN, be aware that it only takes a few minutes to get one using the IRS EIN Online Application. I highly recommend that you use an EIN on your 1099s and protect the privacy of your social security number. 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 the year in box 7, labeled "nonemployee compensation." Fill out one 1099-MISC for each of your service providers. The form covers half of the page, so you can put two service providers' information on each sheet. Preparing Form 1096 This is a single sheet transmittal form. You send one Form 1096 with all of your 1099-MISC forms. 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. 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. If you are a sole proprietor business owner (which includes most all family child care providers), enter "owner" as your title. Preparing the forms for mailing Now it's time to separate the carbonless pages of each Form 1099-MISC. On top is the scannable red form that goes to the IRS. Do not cut the top red forms apart. Set them aside. After that comes Copy 1 (for your state tax department, if necessary--you won't need it if you are in California), Copy B (for the recipient), Copy 2 (for recipient's state taxes, if necessary) and Copy C (for the payer, which is you). After you have separated all four of the carbonless copies, send Copy B and Copy 2 to the recipients (your workers) by January 31. Keep Copy C for your records. If possible, I recommend that you also make a copy of the red 1099-MISC for your records, because the carbonless copies are often hard to read. Make a copy of the 1096 form for your records, as well. 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. Mail the forms to the IRS postmarked no later than February 28. Here is a link to the 1099-MISC instructions for additional guidance.
Last update: 7 January 2009
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