Independent contractors provide a very useful service to many businesses. Bookkeepers can cut their checks without worrying about their tax obligations, but is that all?
Money paid to each independent contractor must be accumulated during the year. For those independent contractors who are paid $600 or more, Form 1099-MISC must be prepared and issued by its deadlines.
Each independent contractor should be issued a Form 1099-MISC no later than January 31st of each year for the previous year’s payments of $600 or more. These can be hand-delivered or postmarked by this date to be considered timely filed.
A copy, along with Form 1096, must also be sent to the IRS by the bookkeeper either by mail by February 28th or electronically by March 31st of each year as well. All Forms 1099-MISC are totaled on Form 1096 and attached to it when filing.
Employers should always keep a copy of all Forms 1099-MISC and the Form 1096 for their files, as well as preparing and filing any required state copies also.
Form 1099-MISC should be completed correctly and completely to avoid errors in processing. The first sections of the form require the payer’s EIN, name and address, as well as a contact phone number. Next, you must supply the recipient’s SSN or EIN, whichever applies, as well as the name and address.
Although this form contains several boxes, for most employers only a few usually apply. In this article, we address the payment of compensation for services rendered to your business by independent contractors. Therefore, we will only focus on these boxes.
Most independent contractor compensation will usually be reported in Box 7 of the Form 1099-MISC. The amount for this individual or individual business should be totaled for the year and the sum reported here by the bookkeeper or the bookkeeping software.
This sum should include fees, commissions, certain prizes and awards, and any taxable fringe benefits paid to this individual or business. Examples include professional services fees, parts and materials if incidental to the provision of the services, and commissions paid to insurance salespersons who are not your common-law or statutory employees. Certain directors’ fees, payments to Section 530 workers, and fish purchases for cash are also included here.
Golden parachute payments must also be included here for disqualified individuals. These include individuals who meet the requirements set forth by the IRS. Bookkeepers should consult with the Instructions for Form 1099-MISC and other recommended references for detailed clarification on golden parachute payments.
For payments made to independent contractors, many other boxes will not apply. However, let’s consider two that might.
Although all nonemployee compensation for services rendered is to be reported in Box 7, certain prizes or awards may need to be reported here. Also, certain amounts paid to deceased employees will be reported here, along with any and all punitive damages paid, and certain other miscellaneous amounts.
If any federal taxes were withheld, they should be reported here. Rarely will an employer need to report any amount here, but this could be necessary if backup withholding is required, for example, or some other voluntary federal withholding was done.