It’s time to start preparing 2009 1099 forms. Every year the question arises: Who gets a 1099?
For the complete answer, see: http://www.irs.gov/pub/irs-pdf/i1099msc.pdf
In general, service providers you have paid $600 or more in 2009 need to be issued a 1099. Service providers include: independent contractors, accountants, public relations firms, janitorial services, etc. Payments to service providers are reported in box 7, non-employee compensation. Sales commissions paid to non-employees are also reported in box 7. This does depend on the type of entity you paid:
- Sole proprietors, partnerships, and LLC’s taxed as sole proprietors or partnerships DO get a 1099.
- C Corporations, S Corporations, and LLC’s taxed as C or S Corporations DO NOT need to be issued a 1099.
I’d like to take a moment to explain what the IRS business mileage rate means to small business owners. It’s quite simple really…it’s the maximum amount per mile you can deduct from taxes if you’re reimbursing using the mileage method. If you reimburse employees more than this rate, the overage is taxable to them (known as a taxable fringe benefit). On the flip side, you don’t HAVE to reimburse this amount. It’s the MAXIMUM deductible amount, not the required amount (unless you’re in California, everything is different there!).
So, if you’re like many of the small businesses I work with and the thought of reimbursing 50.5 cents/mile for a trip to the post office is something you can’t handle, it’s okay. It’s nice to reimburse at the IRS rate, it’s a good thing to do, but you don’t have to. Sure, your employees will complain because all of their ill-informed friends have told them they are mistreated. You can simply tell them that the IRS sets the maximum tax deductible amount and they can consult with their tax preparer about the possibility of deducting the rest. The IRS certainly doesn’t know how to manage your business!
A question was posted on LinkedIn regarding how to pay the owner of a LLC: http://www.linkedin.com/answers/finance-accounting/accounting/FIN_ACC/149517-15002788. I posted an answer to this question and thought it might interest some readers here. This is a common question among business owners, so I’ll expand on the answer.
When a LLC is created, the tax treatment is determined. Payments to the owners of the business are made per the tax treatment.
Sole Proprietors (or LLC single member): No payroll is paid to the owner. The owner may take draws from the business.
The question I get asked most frequently from new clients is "what are the independent contractor rules?" All small business owners like to use independent contractors to save money and avoid the dreaded payroll.
The IRS and state agencies want to ensure that you are not misclassifying employees as independent contractors to get around employment laws and taxes. You must be sure you’re following the rules or you could face stiff penalties. In the event worker’s are reclassified during an employment audit, you could be forced to pay all of the employment taxes owed from prior periods plus penalties and interest. (and yes, they do regularly audit small businesses. I’ve personally handled 2 audits in a two year period for my small client base.)
So, how do you know that you are classifying independent contractors appropriately? Well, it’s not as easy as you would think. The IRS and individual states employ different rules. The general rule for any employment law is you must follow the most conservative law. If the state’s laws are more stringent, you must follow state law…it’s usually the state that further clarifies a federal law.