YES YES YES!
I am not going to make you read 400 words before I answer this question because this is super important. YES, reporting 1099 Contractor payments as a small business owner is necessary and REQUIRED! Making sure that 1099 Contractor Reports are accurate and consistent are crucial, for both the contractor AND the creative/entrepreneur contracting out work.
Personally, I use 1099 Contractors for various things in my business. While I successfully did everything on my own when I first started my photography business, it quickly grew too fast for me to keep up with the work and wear all the hats. So, I hired 1099 Contractors for a variety of services, including graphic design work, website designing, and virtual assistant tasks! Independent contractors are extremely beneficial for entrepreneurs because you don’t have to hire them as an employee. When you are starting out, it relieves a lot of financial pressure to only have to pay individual’s for the work they do, without having to provide everything else employers are required to provide (workers comp, matching social security, medicare, etc). I will be posting a more in-depth post next week about the differences between employees and 1099 Contractors.
Why is it so important to report 1099 payments?
Because the liability falls on YOU, the business owner, not the contractor, if you fail to report! If your business gets audited for any reason, the failure to report contractor payments will get YOU in trouble. You are the one the IRS will fine if this is revealed during an audit.
Best Practices and Requirements
If you pay independent contractors, you should file a FORM 1099-MISC, to report payments for services performed for your trade of business. You can now do this online, and its super duper easy. All you need is their name, SSN (or business EIN), address and total amount paid throughout the year and input that info into the online form.
The IRS has provided four conditions that, if met, a small business owner should report payments for services performed by a 1099 Contractor.
- First, you paid the contractor over $600 in one calendar year.
- Second, the payment for services was made in the course of your business.
- Third, the individual you paid is not your employee.
- Fourth, you made the payment to an individual, partnership, estate, or in some cases, a corporation.
What if my Contractor is not a U.S. citizen?
If you hire a contractor that is not a U.S. citizen, and the services were completely performed outside of the United States, then you do not need to complete a Form 1099. Instead, it is recommended that you have them draft a letter certifying that they are not a U.S. citizen or business, and that they are performing the work outside of the country, or have them fill out a W8ben (found at: http://thelegalpaige.com/wp-content/uploads/2018/06/fw8ben.pdf). If you are ever asked about these payments to foreign contractors, you will have peace of mind knowing you have these documents to hand over to the IRS.
I would love to hear from everyone about further questions or concerns surrounding 1099 Contractors. I know tax law can be extremely complicated and I’m here to help!!
Thanks for reading, and don’t forget to check out next week’s blog post all about the difference between 1099 Contractors and employees!