Everyone knows that, as a small business owner, you are required to tell the IRS about payments you receive from other people. But did you know that you also may be required to report payments that you give to other people? In order to prevent people from underreporting their income, Congress and the IRS require small businesses to report payments of $600 or more whenever those payments are made to someone other than an employee of the business. For instance, if your business hires an attorney, an accountant, or even a new member for your board of directors, the IRS wants you to kiss and tell. You are even required to report barter transactions.
The trickiest part of the information reporting requirement is determining whether the person you pay is an employee or a contractor. If you pay a delivery driver, but he owns his own truck, is he your employee, or is he a small business owner himself? The answer depends on the facts and circumstances. The IRS recommends you think about three key questions.
1) Do you have the right to control what the worker does, and how she does her job? If not, she is probably an independent contractor, and you should file a Form 1099 when you pay her.
2) Do you control the financial aspects of the worker’s job? For instance, do you determine whether to reimburse his expenses, when and where he will be paid, or how his equipment is supplied? If so, he may be an employee, and no 1099 is required.
3) What are the terms of your contract with the worker? If you have a long relationship with her, and you are required to give her benefits like insurance and access to a retirement plan, she is probably your employee, so you won’t have to file a 1099.
Most payments to contractors are reported on the Form 1099-MISC, which you can find on the IRS Web site. This year’s forms must be filed by March 1, 2010 for businesses that submit paper copies and March 31, 2010 for businesses that submit electronic copies (businesses that file 250 or more forms must file electronically.) And in order to file your form, you will need the contractor’s taxpayer identification number. Be sure to ask for it before you pay him, so that he doesn’t add a vanishing act to his list of services rendered.
Last, but not least, the digits and the filing date are both important. Penalties for failure to provide correct information can be as high as $100 per return, with no maximum limit on the number of returns. Penalties for late filing range between $15 and $50 per return, with a maximum of $100,000 for small businesses. That’s a lot of dough to give up over a simple mistake, so mark the date on your calendar and circle it in red ink. Having the correct information about information reporting can make all of the difference.
If you’re on the lookout for other small business tax tips, check out the complete archive of Daily Deductions.
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