The IRS is watching your 1099 Filings

Are you aware that the IRS will be watching your 1099 filings closer than ever this year? Just as a “friendly” reminder, there will be two new questions on your company tax return this year:

1. Did you make any payments in 2011 that would require you to file form(s) 1099?
2. If yes, did you (or will you) file all required forms 1099?

The IRS appears to be looking with much more interest at those independent contractors who receive more than $600 per year. Did your business make any payments to an individual or even to a business that was not incorporated (for example, a CPA or a lawyer)? If so, you must provide them with a form 1099.

Many companies make the mistake of thinking that these forms are only necessary for employees classified as independent contractors. This is a big mistake. Remember not to forget all of the independent business professionals that you have “hired” throughout the year as well. Forms must be supplied for all of these unincorporated professionals.

Penalties for forgetting to file, or doing these forms incorrectly can be expensive. These start at $30 per form. Remember, this $30 penalty is just the start; they only increase from that point.

The IRS has understood for a long time that many companies would like to classify their workers as “independent contractors” in order to save on their paperwork and tax liabilities. But this year, they seem to be much more focused in this area, as well as the businesses which use such types of employees.

An independent contractor has been defined by the IRS. When an employer has the right to control and direct only the result of the work and not what will be done and how it will be done. This is a legal definition. It really does not matter if an employee is given a large amount of freedom in their work. If the employer has the legal right to control the details of how the work (or service) is performed, than the employee is not an independent contractor.

Why is the IRS so concerned about these 1099s? The main reason is that there are not any taxes taken directly out of the earnings from independent contractors. In the past, there have been problems not only with 1099 reporting, but also in collecting these taxes. There are also self-employment taxes due from the worker.

Many times the independent contractor may not even realize their personal liability. This is especially true if they are new to world of self-employment or contract work. By getting the word out to businesses, the IRS is hoping to increase awareness and compliance.

Unfortunately, you are not able to download the form 1099 from the IRS web site. You must file either through paper forms (in the mail), or electronically. However, you can download the “General Instructions for Certain Information Returns.”

It is always a good idea to let all of the employees (and business professionals) who meet the independent contractor requirement that you intend to treat them for tax purposes as a 1099 employee or service provider. Let them know in advance that you will be filing their 1099 information with the IRS.

You do not want to “forget” to file these forms and subject yourself to stiff IRS penalties. The deadline for sending paper 1099s is February 28. The deadline for electronic forms is April 2.