If your business paid someone (who was not your employee) a total of $600 or more during the year, you must issue a 1099 to them (unless it is a corporation). For attorneys, 1099s are required even if incorporated or regardless of their entity type. In addition 1099s must be filed with the Internal Revenue Service.
The 1099 filing requirement applies for payments made by your company to people who provided services (including parts and materials), to independent contractors, vendors, people to which you paid rents or lease payments, those receiving awards or prizes or any other type of payment or income to a non-incorporated person or business.
If you fail to file 1099s when required, you may be denied a tax deduction for the expenses and be subject to the following penalties in addition to the taxes:
- The greater of $100 (per 1099) or 10 percent of what should have been reported.
- Penalties for: failure to file timely, failure to include all required information, failure to file machine readable paper forms or failure to file electronically (if required).
- Penalty for failure to collect and remit a backup withholding of 28 percent when payee fails to complete Form W9. (The penalty is equal to the 28 percent that you should have withheld).
- The good news is that the maximum penalty for small businesses is only $500,000 per year or $1.5 million for large companies on top of the taxes owed.
Steps to take to protect yourself
- Have ALL payees complete Form W-9 Request for Taxpayer Identification before you make the first payment to them. If the payee is a corporation have them indicate so on the form.
- Be sure to retain the W-9 forms in a file for your protection and use the information from the W-9s to prepare 1099s when the $600 threshold is met.
For payees who fail to provide you with their tax identification number, either cease to do business with them or withhold the required 28 percent backup withholding from any payments you make to them and forward it to the IRS.