1099 Basics for Small Business Owners

This is an excerpt from a guide for Small Business Owners by E-File My Forms. Their website is a low cost and solid resource for electronic filing of 1099 tax forms if you are not utilizing your accounting software or your accountant to prepare your Annual 1099 form filing.

While not a substitute for tax advice from an expert, this guide is designed to help you understand the basics of 1099 reporting for independent contractors to remove the complexity and help you understand your obligations so everyone avoids IRS and state penalties.  

As a successful small business owner, you know how useful it can be to hire independent contractors with specific expertise and skills. You can bring them on when you need them with without the commitment or cost of an employee. But, then you have those 1099 forms to contend with.  

1099 reporting used to be fairly straightforward, but over the past few years, there have been a number of changes and updates regarding the reporting rules that have many business owners confused.  This can lead many business owners to guess on the rules and possibly file incorrectly, or worse just give up and not file at all.  This can be a risky move and result in penalties that can add up quickly and unhappy contractors who are not getting the documents they need to file their taxes correctly.

So let’s get right to it and hopefully we can help remove any stress you may have around this process as a small business owner.

Employee vs. Contractor

The first step in this process is to make sure you’ve correctly classified each worker’s status as an employee or an independent contractor. The rules surrounding whether a worker is an employee or independent contractor are certainly complex, and misclassification or bending of the rules to save money could carry a heavy financial risk.  Let’s take a look at the IRS’s general definition of an independent contractor. The IRS says, “an individual is an independent contractor if the payor has the right to control or direct only the result of the work, not what will be done and how it will be done.”  

The IRS uses Common Law Rules to determine worker status, grouped under three areas: behavioral, financial, and type of relationship. Generally speaking, the more control you have over the worker – and the person’s contributions to the business – the more likely the worker is an employee.

The following general rules don’t cover every item on the IRS list, but they’ll help steer you in the right direction.  Workers are most likely independent contractors if they:

  • Use their own equipment (laptop, phone, tools) to perform the job
  • Work on a temporary basis and are paid “per project”
  • Service other clients, often at the same time (look for an individual business license)
  • Work at an offsite location (occasional meetings at your business location are OK; working onsite for days and months at a time are not)
  • Have the flexibility to set their own hours and schedule

 On the other hand, you should classify workers as employees if they:

  • Are paid by the week or month
  • Obtain training and detailed direction from your business
  • Work full time on a regular basis
  • Perform most of their job tasks on the premises
  • Can be fired at any time (rather than falling under contractual terms)
  • Provide services that are an essential part of your day-to-day operations

Generally, if you define the parameters, cost, and location of the work, then the IRS would consider this someone that’s working as an employee.  If there’s a mutually agreed negotiation, and your payee is in control over how, where, and when the work takes place, then you’re probably working with an independent contractor. Having a written agreement outlining their particular services makes this completely clear.  Be very careful to establish these classifications correctly at the start of your working relationship.

Make Document Collection and Validation Part of Your Vendor Onboarding Process

Always Collect W-9s: Once you have established who is a contractor, it’s very important to make sure that you collect specific information for tax reporting purposes. This includes their Taxpayer Identification Number (TIN).  A TIN will generally be a Social Security Number (SSN) or Employer Identification Number (EIN), depending on the contractor.  You can make the 1099 filing process much easier on yourself by making sure you collect Form W-9 from every contractor you work, if you anticipate you will pay more than $600. If filled out correctly, this will ensure you have the proper name and TIN combination the IRS requires when filing your 1099-NEC or 1099-MISC tax forms.  

TIN Matching:  Since we mentioned above how valuable the W-9 is “when filled out correctly” there is another best practice called TIN Matching that we want to mention here.  When filing your 1099s your payee/recipient TIN and name must be complete and match what the IRS/SSA has on file.  If it doesn’t, your organization may receive a “B Notice” and eventually a penalty notice that could cost you hundreds of dollars in penalties for every name/TIN mismatch (more on B-Notices later).   

Mismatches can happen for a variety of reasons – from typos and transposed numbers to unreported name changes with a marriage or divorce. The bigger concern, however, is missing, incomplete, or outright false TINs.  You can mitigate any of these challenges and make sure your reporting is correct by doing a TIN match with the IRS before you file to ensure your contractor data is correct.  

There are two types of TIN matching offered by the IRS: 

  • Bulk TIN matching checks many records against the IRS’s database all at one time. The payor uploads .txt files composed of up to 100,000 name/TIN combinations and receives a response from IRS within 24 hours on the status of the uploaded records. 
  • Interactive TIN matching enables payors to quickly verify that information is correct, usually for individual or small groups of forms. The payor can submit up to 25 name/TIN combinations at a time, and the IRS system responds within seconds. 

While bulk TIN matching is useful for checking records just before or during reporting season, interactive TIN matching can be incorporated into your contractor onboarding processes prior to reporting season. With it, you can check for name/TIN consistency in real-time throughout the year and correct errors one at a time rather than getting hit with a load of bulk-matching corrections at the end of the year.     

For more information on how eFileMyForms can help you ensure accurate name/TIN records, please visit our 1099 Reporting Services page.  

What Form(s) should I File? 

When hiring independent contractors, generally you will file a 1099-NEC (Non-Employee Compensation) form.  The 1099-NEC is used for self-employed individuals operating a sole proprietorship, single member Limited Liability Company (LCC), Limited Partnership, or Estate. It generally doesn’t apply to C-Corp or S-Corp contractors, sellers of merchandise, freight, storage, or similar items, among a few other exceptions. 

The threshold for the 1099-NEC form is a total of $600 paid to the non-employee during the year. This could be across multiple projects or for just one project, but you will need to complete a separate 1099-NEC for each contractor you work with. 

The other common form you may be familiar with is the 1099-MISC.  While independent contractor payments used to be reported on the 1099-MISC, the IRS introduced the new 1099-NEC form in tax year 2020, changing the title and purpose of Form 1099-MISC from Miscellaneous Income to Miscellaneous Information.  Here is how various types of payments would be reported on these two forms:

  • 1099-NEC. Businesses will now file Form 1099-NEC for each person to whom they paid at least $600 during the year. This payment would have been for services performed by a person or company who IS NOT the payor’s employee. (Link to instructions to Form 1099-NEC)
  • 1099-MISC. Other payments over $600 that a payor makes for things such as rent, prizes, awards, or “other income payments” are reported on Form 1099-MISC.

One other wrinkle to this form question is related to credit card payments to a contractor/vendor.  The IRS allows taxpayers to exclude from Form 1099-NEC any payments you made by credit card, debit card, gift card, or third-party payment networks such as PayPal or Venmo.  These payments (over the $600 threshold) are being reported to the IRS by the card issuers and third-party payment networks on Form 1099-K.  

How to File 1099-NEC Forms

You must file a copy of each 1099-NEC form with the IRS and get a copy to your contractors by January 31st.  Currently, if you have less than 250 1099-NEC forms, you can choose to send paper copies. But if you have more than 250 1099-NEC forms, you must use the electronic filing system.  

If your company has never filed 1099s or never filed electronically before, in order to do so on your own you will need to obtain an IRS E-Services account and then a Transmitter Control Code (TCC) for your organization.  Applying for and maintaining an IRS E-Services account and TCC is an extra burden for many small business owners.  As a result, for many small filers, it is more convenient to simply utilize a service like eFileMyForms to electronically file for you.  

Deadlines

Taxpayers are required to print and mail out all Forms 1099-NEC and 1099-MISC forms by no later than January 31st.  The deadline for the 1099-NEC to file with the IRS is also January 31st.  The deadline for filing the 1099-MISC varies depending on the types of payments and falls on either February 28th or March 31st.   The recipient and filing deadlines for the most common information reporting forms are included in the table below.

Diagram 1 – 2022 Deadlines for payments in 2021 requiring Form 1099s

Form1099 Due Date to Deliver to RecipientsDue Date to file Forms with the IRS by MailDue Date to file Forms with the IRS via E-File
1099 NECJanuary 31, 2022January 31, 2022January 31, 2022
1099-MISC
(No Data in Boxes 8 or 10)
January 31, 2022February 28, 2022March 31, 2022
1099-MISC
(With Data in Boxes 8 or 10)
February 15, 2022February 28, 2022March 31, 2022
1099-B & 1099-SFebruary 15, 2022February 28, 2022March 31, 2022
1099-ING, 1099 DIV, 1099-C, 1099-R, 1098, 1098-TJanuary 31, 2022February 28, 2022March 31, 2022

*Always confirm any new updates at http://www.irs.gov before proceeding with tax filings.

Potential Penalties

Late/Incorrect Filing: Penalties for not filing a correct 1099 can add up quickly and vary from $50 to $110 per form, depending on how long past the deadline you file. In addition, if the IRS can prove that a business intentionally disregarded the requirement to provide a correct payee statement, they are subject to a minimum penalty of $550 per statement, with no maximum, and the IRS will typically charge interest on top of the penalties!

Diagram 2 – Penalty Table for 1099 Filings in 2022

Penalty per Form 1099-NEC, 1099-MISC, 1099-DIV, 1099-INT and 1099-RLength of Delay
$50Not more than 30 days late
$110More than 30 days late, but before August 2nd, 2022
$270On or after August 2nd, 2022
$550Intentional neglect to file

*Always confirm any new updates at http://www.irs.gov before proceeding with tax filings.

Name/TIN Mismatch: in addition to late filing fees, you could also receive potential penalties for any name/TIN mismatches, as we mentioned earlier.   If you file several hundred forms, the risk of name and TIN mismatches becomes more likely.

State Considerations

With technology today, it is very easy for many small businesses to work with people all over the United States and the World.  If you work with contractors or vendors in multiple states, you must also pay attention to various state 1099 reporting obligations.  Many 1099 forms have specific state filing obligations.  This adds exponential complexity to the process because instead of dealing with just one set of rules (the IRS), you may find yourself dealing with 5, 10, or more.  

Some states require filing at different thresholds, some have different filing deadlines, and they each have unique filing methods.  In many instances, state reporting can be satisfied through the IRS Combined Federal State Filing Program (CF/SF) where the IRS will electronically file original and corrected information returns to participating states for approved filers.  The challenge is some states do not participate in the CF/SF and some that do still require your organization to directly file certain 1099 returns directly.  The 1099-NEC is a good example where 26 states and the District of Columbia currently require the information to be filed directly with the state department of revenue.  

To learn more about specific state reporting requirements, visit our 1099-NEC Direct State Reporting Service page. 

Wrap Up

Tax compliance can be a burden and every business owner hates the idea of wasting hard-earned dollars on activities that are not growing the business.  But with a bit of process, a bit of planning, and the right tools, you can simplify the complexity of 1099 reporting and ensure compliance while spending as little time and resources as possible in the effort. 

1099 Basics for Small Business Owners – eFileMyForms

The Best Business Entity for Your Small Business

One of the questions I get asked the most is “which type of entity should I form for my small business?” The answer is always.. “it depends”. There are many reasons to choose to move from a Sole Proprietorship to a Corporation – there are both tax benefits and legal benefits – but you also have to consider your cash flow and your business goals. The administrative and tax filing fees for Corporations and Partnerships are higher than Sole Proprietorships, so you want to make sure you have the cash flow to maintain the business structure.

I am including two resources I’ve found that help break down the benefits of each formation as well as walk you through the steps to make a decision that is right for your business.

A Guide to Selecting Legal Structure

The Best Business Entity for Your Small Business

If you need support, schedule a “Sleep Better at Night” consultation with our office.

Many Happy Returns!

What does financial freedom look like to you?

FINANCIAL FREEDOM PRESS    
  Volume 5 Issue 10

Since May, we have been celebrating freedom – those who died for certain freedoms (Memorial Day); the freedom of the last enslaved Africans in Texas (Juneteenth) and US’s freedom from Great Britain (4th of July). On July 18th, we celebrate a man who epitomizes the fight for freedom on his birthday, Nelson Mandela. The United Nations approved the celebration of Nelson Mandela International Day in 2010. The holiday is celebrated by encouraging “each person to dedicate 67 minutes of their time to collectively make a difference through volunteering, donations and community service”.

As our community service, MT Austin and Associates will be live on our Instagram page, for 67 minutes providing a FREE information session on personal money management and answering any of your personal money management questions. Sole proprietors are welcome to join and ask any business-related questions as well. The live will begin at 4:30 EST and will be your ONLY opportunity to receive FREE advice from our CEO. Feel free to share this invitation with friends and if you haven’t already, like our page and set your Instagram to receive notifications for all of our live videos.

If you are unable to attend, please leave a comment on our page or DM your questions. Also, be sure to review the saved live event at your convenience.

We also wanted to share a couple of additional financial resources:

● List of funding sources – Includes both local and national sources available to small business owners. Please note the deadlines for filing and contact the sources for more information about applying for these grants.      

● Restitution For anyone who may have been defrauded in a 2004-2017 Western Union scam, the deadline has been extended to recoup funds through August 31, 2022. Learn more at the Federal Trade Commission website.

Don’t forget that you can engage MT Austin and Associates to assist you with your mid-year financial checkup by signing up for a one-on-one one-hour “Sleep Better at Night” session. During the session, you will have an opportunity to discuss your current financial situation and set goals for the remainder of the year. Our summer calendar is filling up so please make your appointment today. (Our offices will be closed for Summer Break the first week of August.)

For those who still need to file their 2021 taxes,  don’t forget to upload your documents to your secure Verifyle by September 30th.  If you still have questions about tax issues prior to providing your documents , we suggest a 30-minutes “Sleep Better at Night” sessionNOTE: If you sign up for a session you will receive a 10% discount on your 2021 tax preparation.

Please continue to keep up to date on all of our services/program offerings by following us on LinkedInFacebook and Instagram. Also, keep your feedback coming about our new branding through our @thewealthactivator Instagram page.

Let’s celebrate Nelson Mandela through service to others and our own financial independence!

Mary Tonita Austin
CEO, MT Austin and Associates and The Wealth Activator

Are you an emerging business owner in Philadelphia? Before you pay for your Commercial Business License, you may want to check out this resource:

What is Jump Start Philly? – Business Services

What is Jump Start Philly? – Business Services
Photo by David McBee on Pexels.com

Jump Start Philly is designed to attract new businesses and entrepreneurs that create jobs to Philadelphia by exempting them from paying the Net Profits Tax and the Business Income and Receipts Tax, formerly the Business Privilege Tax, during the first two years of operations. Additionally, fees will be waived for eligible new businesses for a variety of licenses and registrations, including the Commercial Activity License, formerly the Business Privilege License.

All businesses are still required to apply for applicable licenses, but eligible new businesses pay no fee. To qualify for this exemption, your business must meet certain requirements.

For qualifying new businesses, exempt license fees include:

  • Amusement license
  • Food establishment license
  • Sidewalk café license
  • Curb market license
  • Street vendor license
  • Sidewalk sales license
  • Center City vending license
  • Neighborhood vending license
  • Newsstand license
  • Handbill distribution license
  • Weights and measures registration
  • Waste collection and recycling licenses
  • Towing license
  • Auto repair shop license or permit
  • Hazardous chemical license or permit

To qualify as a “New Business” for these exemptions:

  • The business must be a “New Business.” A New Business is a business that was not subject to Philadelphia business taxes at any time during the five Tax Years prior to starting business activity within Philadelphia.
  • The New Business must file with the Department of Revenue a New Business Waiver Application. This application is wrapped into the online process of registering for the Business Income and Receipts Tax, and within the paper application for the Commercial Activity License.

To maintain “New Business” status:

  • The New Business must have at least three full-time employees, who are not family members and who work in Philadelphia at least 60% of the time, by the first 12 months of the business and continuously through the 18-month anniversary of becoming a new business, and
  • Have at least six full-time employees, who are not family members and who work in the City at least 60% of the time from the 18 month anniversary of the business continuously through to the 24-month anniversary of operations.
  • A family member is defined as: a parent, spouse, life partner, child, sibling or relative-in-law

Note: If the Department of Revenue finds that a taxpayer claiming the status of a New Business was not entitled to that status after the fact, the taxpayer shall be liable for any unpaid taxes, interest, fees and charges that would otherwise have been due.

Exclusions, the term “New Business” does not include:

  • A business affiliated with or sharing substantial ownership or control with a business that has filed a business privilege tax return
  • A business created through an ownership change of a business that has filed a business privilege tax return, including, but not limited to:
    • A merger, acquisition or reorganization
    • The transfer of an existing business to a person who maintains the same or substantially similar business
    • And the closing of an existing business and its subsequent reopening as the same or similar business
  • A business formed for the purpose of evading or avoiding payment of taxes or fees
  • A business primarily engaged in holding, selling, leasing, transferring, managing or developing real estate

Contact:

For Business Income and Receipts Tax information –
Department of Revenue:
Phone: 215-686-6600
Email

Freedom from complicated PPP loan forgiveness applications if your loan was <=$50K

The U.S. Small Business Administration, in consultation with Treasury, unveiled late in the evening of October 8 a simpler loan forgiveness application for Paycheck Protection Program (PPP) loans of $50,000 or less.
“The PPP has provided 5.2 million loans worth $525 billion to American small businesses, providing critical economic relief and supporting more than 51 million jobs,” Treasury Secretary Steven Mnuchin said in an October 8 press release. “Today’s action streamlines the forgiveness process for PPP borrowers with loans of $50,000 or less and thousands of PPP lenders who worked around the clock to process loans quickly,” he added.  “We are committed to making the PPP forgiveness process as simple as possible while also protecting against fraud and misuse of funds.  We continue to favor additional legislation to further simplify the forgiveness process.” 

Notably, instructions for SBA Form 3608S state that the new application requires fewer calculations and less documentation for eligible borrowers. “Borrowers that use SBA Form 3508S are exempt from reductions in loan forgiveness amounts based on reductions in full-time equivalent (FTE) employees or in salaries or wages,” the instructions state. Additionally, SBA Form 3508S does not require borrowers to show the calculations used to determine the loan forgiveness amount, though SBA may request such information and related documents as part of its loan review process.
The PPP Loan Forgiveness Application Form 3508S can be accessed online along with instructions.  Download Form 3508s here.

If you need assistance with your PPP loan forgiveness application, don’t hesitate to contact our office by email:

support@mtaustinandassoc.com

Stay well!

A Time to Recover

I’ve had to take some time to process all that has transpired this past week. The emotions, the traumatic videos, the grief, the worry and the racist actions and comments on social media all weigh heavy on me and my family. I am a black woman, the mother of a black son and daughter and George Floyd and Breonna Taylor’s murders are my worse nightmare. It is even more terrifying than a nightmare because the probability of it coming true is greater for my children than those who identify white in this country. We are not only tired of the racism and inequalities we experience on a regular basis, the numerous videos of police and random citizens disrespecting black bodies, but we’re tired of feeling that we have to walk around in a world, constantly on eggshells among people who do not cherish us.

So, I’m not here to only write a letter of solidarity, but also of appreciation for my clients who continue to support MT Austin and Associates. Whether you patronize this business specifically because it is a 100% woman and black owned company, or irregardless of that fact, I appreciate your patience this past week as I took time to just be with my family, to step away from the fear, the sadness, the trauma and the heaviness of it all to find some moments of peace. I love seeing the voice of people all over the world speaking out against the injustices and demanding change and I applaud every act of protest seen and unseen.

Crowds gathering in the middle of a town, one person in the middle is holding a sign that reads "Black Lives Matter"
Photo by Kelly Lacy

We appreciate you, and join you in the continued fight for a country that is safe for all of us. If you’re still looking for a cause to support, consider signing a petition to bring justice to Breonna Taylor or fund an organization that helps black men reach their full potential.

Stay tuned as we plan to offer a few of our more popular classes and financial wellness webinars for FREE in order to support our clients as you recover from the COVID19 pandemic. Please visit, like and get notifications from our RESTORATION STATION FACEBOOK PAGE to be the first to know about the dates and classes we’re offering.

Until the next newsletter, stay safe, practice physical distancing, wear your masks and practice radical self care!

As always, we’re here for you!

Many Happy Returns,

MTA

Join me at the Free Financial Wellness Seminar for Womxn September 12th in Philadelphia

You have the passion, you have the vision but you still worry. Will I ever stop living paycheck to paycheck? How do I manage the finances in my business? I’ve started my business now what do I do? Let me help you activate the wealth within you. I am a business visionary and accounting expert with 30 years of experience. It’s time to get beyond the vision and feel confident about your financial future.
.
Click the link below to register for this FREE event sponsored by the African American Chamber of Commerce.

Looking forward to seeing you September 12th at 5pm!

https://aaofpanjde.chambermaster.com/eventregistration/register/1730