There is a lot of misinformation out there about 1099s. I’m going to explain a few of these rules that authors need to know in hopes that I can save you from the wrath of the IRS.
DISCLAIMER: This post is meant to be helpful and not to be used as tax advice for your specific tax situation. Please consult with a tax advisor for more individual information related to your specific situation.
What is an IRS Form 1099?
A 1099 is what the Internal Revenue Service (IRS) called an Information Return. 1099s are a series of forms used for various purposes and reporting of income. For purposes of today’s post, we are going to discuss the 1099-MISC, a form used to report earnings to a self-employed individual (as in not an employee of the company). Also, for purposes of today’s post, we are discussing our need to send 1099s to people we have paid and not the 1099s we are receiving with our own earnings.
Services Greater Than $600
In general, you are required to send a 1099-MISC to independent contractors or others (not employees of the company) you paid more than $600 for services rendered for the tax year. And you must send these 1099s by January 31.
Exception: If these services were paid to an incorporated entity, you are not required to send that person or company a 1099.
For example, I originally sent my editor a 1099 for the editing services he provided. In the next year, he had incorporated. I no longer had to send him a 1099.
If you paid an attorney for services rendered in the course of doing business, you are required to send a 1099 regardless of what type of entity they are. If they’re incorporated, you’re still required to send them a 1099.
Services paid with a credit card or through payment companies such as PayPal
You are not required to send a 1099-MISC to freelancers or other unincorporated businesses such as LLCs if you paid them via a credit card or through PayPal.
In this case, the payment companies such as PayPal are required under certain circumstances to send a different version of a 1099. The payment company will handle all required reporting, and you are not required to send a 1099-MISC.
Should Authors Send a 1099-MISC Anyway?
While you are not required to send a 1099 to anyone you paid through Paypal or with a credit card, you will not hurt anything by sending one.
The general consensus among accountants is to send the 1099s anyway to people paid through payment companies.
Why? The IRS penalizes taxpayers heavily for not sending 1099s, but there is no penalty for sending a 1099 form that was not required (as long as the 1099 is correct).
And, no, this does not result in the double reporting of income for the payees.
What types of services should authors be concerned about?
In my experience, authors should be looking for any amount they paid for covers designers, editing services, attorney fees, accounting fees, author assistants, custom photography work, repair work on computers, and formatting fees, just to name a few. Once you’ve identified the people and businesses you’ve paid, then you run them through the exceptions and questions above.
A few words of caution…
The penalties for not filing 1099s are steep, and the IRS frowns heavily on people who don’t file these information returns. Penalties vary anywhere from $30 to $100 per form depending on how long past the deadline the forms are filed. If the IRS decides that a company intentionally disregarded the requirement to file a correct 1099, the company may be penalized a minimum of $250 per form.
Also, if you don’t file 1099s, the IRS can come in and disallow the deductions you took for that expense. Unfortunately, I’ve seen this happen.
What questions do you have? I’m happy to answer them in the comments.