3 Strategies to Avoid 1099 Reporting & Penalties

3 Strategies to Avoid 1099 Reporting & Penalties

The easiest way to avoid the headaches and potential penalties caused by issuing 1099’s to independent contractors is to structure your activities to minimize the number you have to issue, and prepare in advance if you do have to issue them.

Congress makes you assist the IRS do its job by requiring you to report your worker’s income to the government–you must prepare and file a W-2 form. For independent contractors (IC’s), the rules are much more complex. In general, the law requires a business to file an information return with the IRS, if it pays an IC more than $600 a year. The penalties for the information returns that are late, incorrect, or have missing information are as follows:

  • $50 per return if filed or corrected within 30 days of the filing
  • $100 per return if filed or corrected more than 30 days from the due date, but before August 1
  • $260 per return if filed or corrected after August 1

These are extremely steep penalties, so let’s look at 3 strategies to potentially negate this.

1. Select Contractors That Operate as Corporations

Unless the payments are to attorneys or for health or medical services, your business does NOT have to report payments to corporations on Form 1099-MISC. This rule also applies to LLC that elect corporate status for federal tax purposes. Therefore, if you pay IC’s that operate as corporations of LLC taxed as corporations, you have no 1099 filing requirements!

2. Make Payments by Credit Card or Third Party Payment Networks

Credit card companies and third party networks like as PayPal report these payments to the contractor on Form 1099-K. Therefore, pay your IC’s by utilizing these facilities.

3. Request W-9 Before Making any Payments to IC”S

Require the IC to fill out Form W-9 PRIOR to making any payments for services; this insures

  • the W-9 will disclose the type of entity the IC is operating in
  • therefore, you know if IC is a corporation or LLC taxed as corporation
  • you will not have to track IC down after payments have been made, and they may be long gone

One last note, if IC refuses to provide a taxpayer identification number (TIN), and you pay the IC $600 or more during the calendar year, then you are responsible to withhold federal income on all payments, and file applicable payroll tax returns.