Why should I worry about sending out 1099s?
The short answer to that question is: It can be very expensive if you don’t send out your 1099s.
The IRS requires that you send out a 1099 (and file it and the 1096 with the IRS) for each person to whom you have paid during the year:
- At least $10 in royalties or broker payments in lieu of dividends or tax exempt interest – not a common item for most business.
- At least $600 in:
- Services performed by someone who is not your employee;
- Prizes and awards;
- Other income payments;
- Medical and health care payments;
- Crop insurance proceeds;
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish;
- Generally, the cash paid from the notional principal contract to an individual, partnership, or estate;
- Payments to an attorney; or
- Any fishing boat proceeds.
- A 1099 is also used to report direct sales of at least $5000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Most of these are uncommon but most every business pays for services performed by someone who is not its employee and an attorney. Some manufacturing companies will also need to file 1099s to report direct sales.
The deadline to file your 1099s is January 31st 2017. The penalty for missing this deadline even by a few days could be stiff. If you correctly file your 1099s after January 31st but before March 2nd, you could be penalized $50 per 1099 up to a max of $532,000. That means if you are late and even if you only had to send 10, the IRS could penalize you $500.
If you correctly file after March 2 and before August 1, 2017, the IRS could penalize you $100 per form, up to a max of $1,596,000. So, if you had to send out 10 forms and you didn’t send them until March 4th, the IRS could charge you $1,000.
If you correctly file after August 1st, the IRS could charge you $260 per form with a max of $3,193,000. In our ten forms example, neglecting your 1099s until after August 1st could cost you $2,600. Now the IRS reduces the max fines for each tier for small businesses with less than $5 million in gross revenue, but I don’t know any business that would be happy paying $2,600 for basically nothing.
Finally, if the IRS decides that you have intentionally disregarded your 1099s, the penalty is the GREATER of $530 per form or 10% of the amount required to be reported. In our ten forms example, that’s a minimum of $5,300. Intentional Disregard is what the IRS classifies as you should have known you had to file.
One more penalty to be aware of and why I went into such detail about gathering W-9s last week: If you have missing or incorrect SSNs or EINs, then the IRS can impose fines of $260 per form. This penalty can be reduced to $50 if a correction is filed within 30 days of the January 31st deadline. The penalty may be waived by showing the failure was due to reasonable cause (as in the information provided by the contractor was incorrect) and not to willful neglect. This is why just getting the Tax ID for your contractors is insufficient – you must get a W-9 and you need to keep copies.
In conclusion, It’s just not worth it to roll the dice. Gather that information, send and file those 1099s and don’t give the IRS a reason to come knocking on your door.