The IRS uses Form 1099 as a tool to help verify that taxpayers are reporting their income. Businesses file Form 1099 with the IRS to report payments to vendors or recipients, then the IRS attempts to verify that these payments are actually reported as income on the tax return of that individual or company. If a person or vendor reports less income than was reported on the Form 1099 in their name, with either their FEIN or Social Security Number, the IRS is alerted that there may be underreported income. Any underreporting will trigger a letter from the IRS or state taxing authority.
States such as California will receive the 1099 information from the Internal Revenue Service and do their own verification of the income tax returns that are filed with the Franchise Tax Board. You do not have to file 1099 forms with the FTB. Some states have different reporting requirements.
1. Form 1099-MISC
The most common information return filed by a trade or business is Form 1099-MISC, which is used to report payments of rents, royalties, nonemployee compensation, gross proceeds paid to an attorney and some other types of income. You must file the form if the amount paid is $600 or more to any one vendor or person in any one calendar year. Typical payees for whom you might need to file a 1099-MISC would be cleaning services, contractors, consultants, web designers and professional services. Most businesses have at least a few nonemployees to whom they have paid $600 or more during the year. You can find the 2015 Form 1099-MISC here.
Note: Businesses must look at the total payments made to vendors on a calendar year basis. This is true even if the business has a fiscal year end.
2. Form 1099-INT
Another common 1099 filed by a businesses is Form 1099-INT, which is used to report payments of interest of $10 or more to any one recipient in any one calendar year. The threshold increases to $600 for interest payments that are made during the course of your business and not meeting the rules for the $10 threshold. You can find the 2015 Form 1099-INT here.
Note: Businesses are also required to file Form 1099 for any recipient they withhold (and did not refund) any federal or state income tax, regardless of the total amount of payments to that recipient.
There are some exceptions to Form 1099 reporting requirements. These include the following:
- Payments to corporate vendors are not required to be reported, unless the vendor is an attorney or medical doctor. Attorneys and doctors must be issued a 1099 even if they are unincorporated.
- You are not engaged in a TRADE OR BUSINESS. An example might be an estate or trust.
- Payments that are not for rents, services or other reportable payments. For example, payments for merchandise, telephone, freight, and other similar items would not be reported on a Form 1099.
- Payments of rent that is paid directly to a real estate agent since the real estate agent will issue a 1099 for the gross rent that they hand over to the property owner.
- Payments that are not in the course of doing business. For example, payments to babysitters or gardeners for your home would not be incurred in the course of doing business.
- Payments to employees are not reported on Form 1099. Employees receive a Form W-2.
The penalties for failing to file Forms 1099 range from $30 to $100 per form, depending on how late your filing is and whether or not the failure to file was intentional. Total penalties can go as high as $500,000 for businesses with gross receipts under $5 million or $1.5 million for those with gross receipts over $5 million.
For the reporting year 2014, businesses need to prepare 1099s in time to be given to vendors by February 2, 2015, and IRS copies must be filed by March 2, 2015. The IRS due date is extended to March 31, 2015, for electronically filed returns.
This is a basic overview of the rules involved. Your tax professional can help with determining your 1099 filing requirements or assist in actually filing the necessary forms.