An IRS form 1099 is a form that is used to report payments that you make to others. The IRS uses this information to confirm that taxpayers have reported on their tax return income that they have received. If the income is not reported, then the IRS will typically use the 1099 to assess additional tax.
File the IRS form 1099 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;
- 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 a notional principal contract to an individual, partnership, or estate;
- payments to an attorney; or
- any fishing boat proceeds,
Businesses typically are required to issue 1099s to independent contractors. If you don’t file this form, your deduction could be disallowed or you could be required to pay a backup withholding assessment. When you file this form, the IRS assumes that the recipient has included this payment in income on his/her tax return. If the 1099 has not been issued, it would be very difficult for the IRS to confirm whether the payment has been included in income.
Exceptions to the filing requirement
According to the IRS, you are generally not required to file a form 1099 if any of the following situations apply:
- You are not engaged in a trade or business
- You are engaged in a trade or business and
- the payment was made to another business that is incorporated, but was not for medical or legal services or
- the sum of all payments made to the person or unincorporated business is less than $600 in one tax year
Who is an independent contractor?
The determination of whether a payment is made to an independent contractor as opposed to an employee is an important one. Independent contractors must withhold their own taxes and remit quarterly tax payments to the IRS on their own behalf. The question of whether a worker is an independent contractor can be complex. Facts that provide evidence of the degree of control and independence that determine whether a worker is an employee or independent contractor fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? See more about the factors for independent contractor status here: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
Contact a Los Angeles Tax Attorney
If you have received notice that your business will be audited by the IRS or EDD pertaining to worker classification, contact a Los Angeles tax attorney at Disparte Tax Law today for a free consultation.