Every January business owners and individuals start to think about their taxes – do they owe money or will they get a refund? It’s a question we all ask. The answers start by calculating not only income, but also expenses. Have you considered that maybe you should think about those 1099’s BEFORE January? They really matter ALL year long. Here’s why:
For Business Owners
If you are a business owner, it is your legal responsibility to report payments made to employees or contractors. Wages paid to employees, which are subject to federal tax withholding, are reported to the IRS on the W-2 form and employees receive a copy. If you make payments to a contractor (typically someone who controls their own hours and productivity), they’ll need to receive a 1099 form that lists the total amount of payments made. It is important, before a contractor starts working for you, to obtain the information that will be necessary to prepare their 1099. Ask them to complete IRS form W-9 (https://www.irs.gov/pub/irs-pdf/fw9.pdf). It may seem like basic information, but it’s vital information to have at the end of the year. You can be fined for every 1099 you are required to issue that you do not.
If you find yourself receiving a 1099, it’s important to keep in mind that no taxes have been withheld from those payments. It is very possible that the full amount of money you received could be subject to both self-employment and income taxes. How will you report the income? Are there ways to offset it? Knowing what business expenses you can legitimately deduct to help reduce your taxable income is key. From mileage while driving to see a client to your cell phone use, ordinary and necessary business expenses can be deducted from your income to reduce your tax liability. Items that are “ordinary and necessary” are different for every business.
If you properly track your business expenses, whether as the person paying a subcontractor or as someone who receives subcontractor payments, there should be no reason to fear the 1099.
Whether you receive a 1099 or you think you may need to send someone a 1099, we can help!