Tax season might be far away, but it’s never too early to start keeping good expense and payment records. The 1099-MISC, a form used to report the income businesses pay to contractors, is a common way to report the payments you make in your line of business. You can use it for everything from independent agents’ commissions to recording payments for painting work on a rental property to property manager payments.
Filing the form for every contractor you employ does more than keep you in good graces with the IRS. By qualifying work done for rental properties as a business, it also makes certain landlords eligible for certain business-related deductions.
Here are some common questions (and misconceptions) about Form 1099-MISC.
Who needs to file the 1099-MISC form?
What do a broker who made commission payments to independent agents and a landlord who hired repair workers to spruce up a rental property have in common? Both (and anyone else who paid independent contractor more than $600 in a single tax year) needs to file the 1099-MISC.
Who doesn’t need to file the 1099-MISC form?
The 1099-MISC has a number of exceptions. Payments to corporations, payments for merchandise, telegrams, telephone, and storage and rent payments to real estate agents or property managers are all exempt. The money you pay contractors also needs to be related to your line of business, so any work that you do on your own primary residence is automatically exempt.
Why file the 1099-MISC form?
The IRS recently clarified that landlords are included in the list of professionals who need to file Form 1099-MISC for the work done for their rental properties.
Ignoring it entirely makes you run the risk of steep fines and penalties, but there is another reason to keep good records and file the form. As Stephen Fishman wrote for NOLO, doing so turns your rental property into a business rather than an investment — and makes you eligible for various tax deductions (such as the 20 percent tax-deduction for pass-through businesses) to lower the total tax owed in April.
“The real reason is that there are penalties for not filing Form 1099-MISC of up to $100 per form. Remember you have to file a separate 1099-MISC for every contractor you pay more than $600 during the year,” explained CPA and CEO of WealthAbility Tom Wheelwright.
How do you file the 1099-MISC form?
First, get the forms you need at either Forms, Instructions & Publications (online) or Online Ordering for Information Returns and Employer Returns (print). Form 1099-MISC comes in five copies — Copy A, Copy 1, Copy B, Copy 2 and Copy C.
Each one needs to include the contractor’s contact information and the amount of money that you paid. Copy A (the one in red) needs to be filed to the IRS by Feb. 28 (or April 1 if filing online).
Copy B and Copy 2 with the previous year’s information should be sent to the contractor by Jan. 31. Copy 1 is for state tax authorities while Copy C is for your own records.
Which tools do I need?
Although you can still file the paper version of the form yourself, most businesses now do it online. Accounting software programs such as Quicken, Quickbooks, Bench, Gusto and Advanced Micro Solutions can all file the form for you.
I’m still confused! What do I do?
Filing the form properly will prevent many problems later on. Reach out to a tax attorney for help or go to the IRS directly at Instructions for Form 1099-MISC or 1-866-455-7438 with questions.