Okay, It's January
...what you need to know about 1099's and independent contracting


What's that you say, "Boring?"  You actually think
this article is going to be ho-hum because we're going
to discuss a tax issue?

While I admit the topic of taxes may rightfully invoke
a yawn or two, go ahead... relax!  The most you'll have
to pay for filing late or incorrect 1099's is $100,000.

Ouch!

So, are you still bored?  Or, have I captured your
attention?  Truly, taxes are one of those things you
simply need to bite the bullet on and acquire a
knowledge of when in business for yourself.

But, aren't 1099's one of those things you can simply
let a CPA or outsourced bookkeeper worry about?  The
answer to this can easily be found in another question.

If your bookkeeper forgets to send out your 1099's or
makes a simple error, who is responsible for paying
the stiff fine the IRS will impose?

You, of course.

But, certainly, a CPA would be responsible if he or
she makes the error though, right?

While a CPA is not blameless, again you are ultimately
responsible for your own tax issues.

I wish I had a dollar for every self-employed business
owner I've heard say they simply "let their accountant
take care of it."  I'm honestly amazed at what a common
practice and attitude it is to let someone else take
full charge of something that ultimately affects
themselves in the end.  Those who choose not to be
accountable for their own business tax issues usually
get stung somewhere along the way.

Ignorance is bliss until you're forced to take
responsibility.

Don't get me wrong here.  I'm not saying you shouldn't
outsource this task to a bookkeeper of CPA.  I've sent
plenty of business their way myself.  What I am saying
is that you must make sure you know the law, that you
know what forms must be completed and submitted when,
how much and to whom.  Look over all figures and forms
before anything goes out, whether by you or by your
accountant.  It's part of being in business.

If you become paralyzed at the very thought of filling
out and sending tax forms, don't worry, you're not
alone. In fact, this describes the majority of green-
behind-the-ear self-employed business owners.  We've
all been there at some point or other.

Take heart.  Take a deep breath.  I'm going to lay out
the basics for 1099's in this article.


—— So, what are 1099's?

1099's are a common part of most small businesses.  A
1099 is nothing more than a short form you must fill
out and give to anyone whom you have paid $600 or more
during the past year for their services or otherwise.

The recipient of the 1099 should report it as income
on his own taxes.  Then, just to be sure the
independent contractor doesn't forget to report it as
income, the IRS requires that you follow up with a
summary (FORM 1096) to the IRS of the 1099's you sent
out.

How convenient.  Don't you just love the IRS?  I hope
you noted the bit of sarcasm in that question.

The IRS isn't alone.  One copy of each 1099 is
earmarked for state tax also.


—— To whom should I send a 1099?

You should send a 1099 to anyone who qualifies as an
independent contractor — any individual or company
that performed some specific service(s), project(s) or
consulting.  Whether the independent contractor calls
him or herself self-employed, a consultant,
entrepreneur, company, business owner or otherwise, it
makes not difference in the eyes of the IRS.  Usually,
an independent contractor provides some type of
specialized expertise, either on a one-time basis or
intermittently throughout the year.

Note that you should also send a 1099 to any individual
or business you paid over $600 in interest, rent,
prizes, awards, royalties, or for broker of barter
exchange transactions.


—— What are some examples of independent contractors?

An independent contractor is someone you don't have to
train, works on his or her own time schedule and with
his own equipment.

Since the independent contractor has chosen to set up
his own business and take the risk of finding his own
income, he also assumes the responsibility of handling
and reporting his own employment taxes.  He does this
partially from the 1099's that you and others send to
him and to the IRS.

Although there are many factors that play into whether
a professional qualifies as an independent contractor,
the general guideline is how/when/where they do their
work.  It should be noted that profession alone does
not define an independent contractor.  An example is
a bookkeeper.  If the bookkeeper uses your equipment
(how), and/or works during hours you determine (when),
and/or does work in your office or place you make
available (where), that bookkeeper would be considered
an employee and not an independent contractor.

Though not always the case, here's a list of
professionals that are commonly independent contractors:

· attorneys
· accountants
· bookkeeping and answering services
· graphic designers and web designers
· contract computer programmers
· computer maintenance and repair services
· janitorial services
· contract landscape maintenance
· marketing, management, etc. consultants


—— What happens if I mess up?

Filling out and sending 1099's really isn't hard at all.
However, you must keep good records during the year so
it becomes a quick, easy task rather than a drudgery.

The IRS is very good about slapping you with fines.
Here are some things you'll want to shy away from to
avoid these fines.

· Mis-classifying an independent contractor

It's important that you learn how to classify an
independent contractor.  The IRS may beg to differ
whether a person should be classified as an independent
contractor vs. an employee.  When this is challenged,
the consequences for mis-classifying can be financially
devastating. You must pay the IRS all back taxes owed,
with interest, plus a penalty of 12% to 35% of the tax
bill.

It hurts just thinking about it!

· Filing late

Along the same lines, if you are late in filing, fines
can add up quickly.  Forms must be sent out by the end
of January.  If the recipient does not receive his 1099
from you by the first of February, he may complain that
he cannot do his taxes, thus setting a flag for the IRS.

· Making mistakes on the 1099's

There's a whole slew of errors the IRS is happy to
charge you for.  Here are the most common: 1) you don't
use the correct magnetic paper provided only through
certain outlets, 2) you don't put the right Taxpayer
Identification Number on each 1099, 3) you don't
include enough information so the IRS can figure out
the correct name, and 4) you round off figures to the
closest dollar.  The IRS like pennies.

If you make mess up, the IRS threatens to charge you
$50 per form with an error.  However, for small
businesses the IRS mercifully caps your maximum
penalty at a mere $100,000.  Don't you fell better now?

While I know this all sounds terribly threatening, you
will most likely never have to face any fines as long
as you keep good records and double check each 1099
and form for accuracy.

One advantage the IRS does give you is that you don't
have to file your summary (FORM 1096) with the IRS
until the end of February.  This gives you some time
to correct an error with an independent contractor
if he or she feels there's been a mistake before your
summary is sent.

Errors usually happen when you are in a hurry.  Don't
leave completing your 1099's until the last day of
January.  You'll make yourself very vulnerable to
errors as all you can think of is rushing to the post
office.

I've found that the IRS will often forgive if you are
honest with them and correct your mistakes quickly.


—— How do I get started?

First...
You should look through last year's records for
payments made to independent contractors, if any.
This will tell you how many forms you will need.
Total up how much you paid each independent contractor.

Second...
Once you know how many forms you'll need, you can get
correct "magnetic" forms at the following sources:

· phone 800-TAX-FORM from 7:30 am to 5:30 pm weekdays
  (often takes weeks to receive forms)
· your CPA's office often has some spares
· local office supply store often carries packages of
  1099's for your type of printer (package may or may
  not include set-up software)

Third...
Below are the forms you should request.

For the independent contractors whose needed
information you do not have, i.e. Tax Identification
Number (TIN), order some W-9's to send to your
independent contractors requesting their information
for your files.

Also ask for form(sheet) 1099-MISC.  Each letter-size
sheet has three 1099 forms.  These should be sent to
your independent contractors by January30th.

While you're at it, request FORM 1096 which is the
summary or "cover sheet" you will send to the IRS along
with copies of the 1099's.  These are due to the IRS
by February 28th.  It's easy to forget if you wait, so
you may want to send this report out at the same time
you send the 1099's to your independent contractors.

Fourth...
Read instructions carefully for each form, fill them
out and send them off by January 31st.
Here's the URL for the IRS's instructions on filling
out the 1099-MISC:
http://www.irs.ustreas.gov/prod/forms_pubs/instruct/i1099m-toc.html
Here's what a 1099-MISC looks like with all its copies
(this is a pdf file):
http://ftp.fedworld.gov/pub/irs-pdf/f1099m00.pdf


Okay, you're off and running.

After going through this exercise, you'll realize it
really wasn't that difficult.  If you're still unsure
how all this works, get help from your CPA.  You can
also read up on the subject at the Nolo Press Self-
Help Law Center at http://www.nolo.com .

Okay, it's January.  January mean it's business forms
month for small businesses.

Let's get crackin'.

------
Note: You have permission to reprint this article
in its entirety with the author's credits below.

Heidi Perry, the author of this article and a
successful entrepreneur, is editor of HomeBizBytes
and co-founder of HomeBusinessOnline.com.  Sign up
for her popular newsletter at
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