For Whom Should Form 1099-MISC, Nonemployee Compensation, Be Prepared?

This post concerns only payments made in the course of your trade or business to independent contractors that are reported in box 7 of Form 1099-MISC as “nonemployee compensation.”  The IRS began asking questions about taxpayers’ compliance with preparing Forms 1099 with the 2011 income tax returns.  The purpose behind Form 1099 reporting is to close the “tax gap” by catching people who don’t pay income tax on all of their earnings.  Since tax returns are signed under penalties of perjury, answering this question accurately is important.  Congress has also dramatically increased the financial penalties for not filing Forms 1099 on time.  In general, the 2015 Form 1099-MISC should be provided to the recipient by February 1, 2016 and filed with the IRS by February 29, 2016 if filed on paper, or by March 31, 2016 if electronically filed.  Electronic filing is required if 250 or more forms will be filed.

Nonemployee compensation are payments made to independent contractors who are not organized as corporations.  This includes partnerships, limited liability companies not treated as corporations, and individual sole proprietors.  However, under a special rule, payments made to attorneys and law firms organized as corporations must still be reported.  Form 1099-MISC is required if total payments for services (including parts and materials) made to a recipient during calendar year 2015 amounted to $600 or more.  Payments for merchandise is not reportable.

How do you know whether a company is a corporation?  You must have the company complete Form W-9, Request for Taxpayer Identification Number and Certification.  The company indicates their entity classification on that form.  You should have a Form W-9 on file for everyone to whom you make payments.  If you are unsure of the business’ entity classification because there is no W-9 on file and you are running out of time to meet the Form 1099 filing due date, complete the Form 1099 anyway to avoid a potential penalty and get the W-9 completed in advance of the next payment you make to the company.  There is no harm or penalty for sending an unneeded Form 1099 to a corporation.