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Reporting Independent Contractors Compensation: A Guide to the IRS 1099 Form

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Reporting Independent Contractors Compensation: A Guide to the IRS 1099 Form

By JimD
Published: October 27, 2010

With the calendar year ending, it is time to start compiling the data for tax reporting. Small business owners need to understand their tax reporting responsibilities to avoid unnecessary fines or penalties. One form many small business owners need to submit is one of the IRS 1099 Forms. The IRS 1099 Form has become closely related to independent contractors, which many small business use.

What are 1099s?
1099s are not just one form, but a class of forms that provide the IRS with an information return. An information return is a tax document that businesses are required to file to report certain business transactions to the Internal Revenue Service. These transactions vary from real estate transactions, sales of securities, charitable gift annuities, and capital gains distributions, but the most common for small business owners are payments to independent contractors.

Who Should Get a 1099?
For small businesses, the most common 1099 would be the 1099-MSC. This form covers any payments to nonemployees, such as independent contractors. Nonemployee compensation of $600 or more including fees, commissions, prizes and awards for services performed should be filled out in Box 7 of 1099-MSC. It is important to remember that this form is used to report only nonemployee compensations - employee compensations are reported on their W-2s.

If you are unsure whether someone is an independent contractor or an employee, you should read this information from the IRS: Independent Contractor (Self-Employed) or Employee. If you are still unclear on how to classify someone, you can file a SS-8 Form. The IRS will then determine the worke;s status for employment and income tax purposes.

Do only Independent Contractors get 1099s?
The IRS uses 1099 forms for reasons other than nonemployee compensation. The IRS lists common types of payments and what form they need to be reported on. Business tax software or small business accountants will be able to help you with filing the proper 1099 tax forms.

How Do I Submit 1099s?
As a business, you are required to file 1099s to the IRS, but also must furnish statements to the recipients of the income. Keeping the proper accounting records will make this easy. You should have tax id numbers for your contractors that are compensated more than $600.

Filers who have 250 or more information returns must file these returns electronically. The IRS has a system called the Filing Information Returns Electronically (FIRE) System. This system does not provide a fill-in form option, so you must have software that will put all your 1099s in the proper format.

If you have made a mistake on an information return just refer to the instruction that come with the forms.

For more information on How to File Your Information Reports, please see General Instructions for Information Returns.

If you have additional questions about 1099s, please ask them in the Filing and Paying Taxes in the Business.gov community.

Related Resources

This article is up-to-date as of posting date. Please check the IRS www.irs.gov for currently rules and regulations on 1099s.

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