
Congress makes you help the IRS do its job by requiring you to report your workers’ income to the government. For employees, it’s pretty straightforward—you file a W-2 for each employee. For independent contractors, the rules are more complex. And with recent passage of the Path act, lawmakers made compliance harder by moving up the deadlines to file W-2s and certain 1099s. We will show you whether the new deadlines apply to you and give you proactive strategies to minimize the number of 1099s you have to file, thus making it easier to comply with the new law. And we will tell you about a new rule that can help big-time if you make small errors on your W-2s or 1099s. When Do I Have to File? In general, the law requires a business to file an information return with the IRS if it pays a worker compensation for services. The most common required forms are · a Form W-2 for an employee if the total payments for the year are $600 or more,1 and · a Form 1099-MISC for an independent contractor if the total payments for the year are $600 or more.2 What Changed Recipient. The date to provide W-2s and 1099s to employees and independent contractors hasn’t changed and remains January 31.3 Government. If you electronically filed your information returns with the government, lawmakers used to give you until March 31 to file W-2s and 1099s. Paper filers had until February 28 (February 29 in a leap year). Now, the deadline is January 31 for all W-2s and for 1099s that report non-employee compensation.4 Since you make almost all payments to independent contractors as non-employee compensation and report them on Form 1099-MISC, this new law has a big impact on you, the small business owner. If the 1099 does not report non-employee compensation, the old February and March rules still apply.5 Extension You can request an extension by filing Form 8809. The IRS grants a 30-day extension automatically for all information returns except W-2s. You can request a 30-day extension to file W-2s, but it is subject to approval.6 The extension applies only to filings with the government. It does not extend the time for providing the W-2s to employees and the 1099s to independent contractors. Penalties for Non-compliance Lawmakers, always on the lookout for new revenue, have been increasing the penalties for W-2 and 1099 non-compliance over the past decade. The penalties for information returns that are late, incorrect, or have missing information are as follows: · $50 per return if filed or corrected within 30 days of the filing date.7 · $100 per return if filed or corrected more than 30 days from the due date but before August 1.8 · $260 per return if filed or corrected after August 1.9 Avoid 1099 Headaches: Three Strategies The easiest way to avoid the headaches and potential penalties caused by issuing 1099s to independent contractors is to structure your activities to · minimize the number you have to issue, and · prepare in advance if you do have to issue them. Strategy 1: Select Contractors That Operate as Corporations Your business does not have to report payments made to corporations, including S corporations, on Form 1099-MISC (unless the corporation collects attorney fees or payments for health and medical services).10 This rule also applies to LLCs that elect corporate status for federal tax purposes.11 If all your independent contractors are corporations or LLCs taxed as corporations for federal tax purposes, you have no 1099 filing requirements. Period! Strategy 2: Make Payments by Credit Card or Third-Party Payment Networks Don’t report payments made via credit card and other third-party payment networks like PayPal on a Form 1099-MISC. 12 Credit card companies and third-party networks report these payments to the contractors on a Form 1099-K.13 Strategy 3: Always Get a W-9 Up Front Before Making Any Payments to the Contractor By getting the W-9 up front before you make a payment to the independent contractor, you guarantee several things: · You know whether you have a 1099 filing requirement for the independent contractor, because he, she, or it discloses the business type to you. · You know whether an LLC is classified as a corporation for federal tax purposes and, therefore, excluded from 1099 reporting. · You won’t have to chase the contractor down next year for the required information if you have to file a 1099. Once you’ve paid the contractor, your leverage for the 1099 information is gone and the contractor might not give you the information you need. DANGER! If an independent contractor refuses to provide a taxpayer identification number (TIN), and you pay the independent contractor $600 or more during the calendar year, then you have to withhold federal income tax on all payments made to that independent contractor.14 If you don’t withhold, your business owes the tax unless you can show the contractor paid income tax on those amounts.15 Planning tip. Always get the W-9 up front! Here’s a little-known loophole in the law that can help: if you don’t or can’t get a W-9, but the business name contains an “unambiguous expression of corporate status” (e.g., “Inc.” or “P.C.”), then you can rely on that name as evidence you don’t need to issue a 1099.16 One Beneficial Change for Small Business Owners Lawmakers also made your life as an employer easier if you have to correct erroneous W-2s and 1099s. There is now a “de minimis” safe harbor rule that states if a single amount on an information return is incorrect by $100 or less ($25 for tax withholding), then you don’t have to correct it.17 So if you are rushing to issue your 1099s and you’re off by a few bucks, the IRS mercifully does not require you to fix the errors and issue corrected W-2s or 1099s. Takeaways Save yourself time and headache caused by issuing 1099s to your independent contractors. You can do this by taking these actions: · Choosing contractors that are corporations, including LLCs that are treated as corporations for federal tax purposes. You don’t have to issue 1099s to corporate contractors. · Making independent contractor payments by credit card or third-party payment networks, because you do not report those payments on a Form 1099-MISC. · Getting a W-9 up front before issuing payments, so you have the necessary information and know your potential filing obligations from the start.
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