What Is a 1099?
When you are paying an independent contractor (not an employee) and you paid them more than $600 in that calendar year, you are required to issue them a 1099 by Jan 31 of the following year.
1099s have various federal and state guidelines. For instance, California has new rules about who you can pay as an independent contractor and who you can’t.
Federally, for the most part, the general guideline is that an independent contractor has to be allowed to operate without somebody else managing how they do their work.
There are various guidelines that you can see in the link below. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined
Assuming the independent contractor falls within these guidelines, and they are located in the US, a business owner has to track all the money that they pay them and send them a 1099 at the end of the year.
I always recommend that before giving an independent contractor their first payment you have them fill out a W9. A W9 is a form that simply asks for their current address and social security number or tax ID. When you get a W9 filled out before you make a payment, you can easily send out the 1099s on time, instead of rushing at the last second to get W9 information.
A business owner should get a W9 from every independent contractor or company with which they do business. If the independent contractor is a corporation, you do not have to send them a 1099 at the end of the year, but it is good practice to have a W9 from them. If they are an LLC, you might not know if they’re an LLC that’s taxed as a sole proprietor or if they’re an LLC taxed as an S Corp. A W9 from them gives a business owner that information.
You would request a W9 from companies or individuals you receive services from. You wouldn’t send a 1099 to a restaurant or a company or individual from whom you buy goods, parts, or products. You would only send a 1099 to companies or individuals from whom you purchase services.
Another thing to know is that you would not send a 1099 to any company or individual you paid using a credit card, because the credit card merchant will send them a 1099. Your bookkeeping software will not let you create a 1099 for any independent contractor paid by credit card. There are a few other payment methods that work similarly; for example, if you pay an independent contractor using PayPal (but not PayPal Friends and Family).
If you paid an individual or company by cash and you want to deduct it as an independent contractor expense, you have to issue them a 1099. I personally recommend not paying for any business expenses in cash because cash is hard to track and prove for your business deductions, but if you do use cash to pay an independent contractor, you must record the transaction and issue a 1099.
Please let me know if you have any questions or need any help issuing 1099s to your independent contractors.
Maya Weinreb | Founder & CEO