This week’s tax question:
My business had subcontracted employees and paid them through their own LLCs. Do I need to provide them with Form 1099s?
We passed the question on to Betty Kayton, who assists startup firms and entrepreneurs with financial, human resources and tax matters until these firms are ready to hire a full-time chief financial officer. She submitted this answer to VentureBeat:
There are a lot of misconceptions about 1099 forms. I’ll try to address the main issues here through a list of frequently asked questions.
Who needs to get 1099?
You must send a 1099 form to anyone that you pay money to, unless they meet one or more of the following exceptions:
the recipient is a corporation
you included the payment in a W-2 form (to an employee)
the payment is for a tangible product (office supplies, computers, etc), or
the total payments during the calendar year were less than $600.
So what are some examples of things that need a 1099?
Anything not excluded the above list. Examples include: legal fees, marketing consultants, outsourced programmers, interest paid to lenders, rent paid to landlords, and public relations fees. There are some real surprises lurking around “who is a corporation”. For example, few people know that AWS (Amazon Web Services LLC) isn’t a corporation; so if you paid AWS more than $600 during 2010, you need to send them a 1099 form. Likewise, 37 Signals, a major provider of Web-based software to many startups and other companies, is an LLC. On the other hand, some accounting firms are corporations (and thus don’t need a 1099).
This sounds impossible to deal with. How am I supposed to know who is a corporation? My Magic 8-Ball and Oujia board are both packed away in the attic.
You don’t need to guess. The easiest way to gather the needed information is to always get every new vendor to provide you with a W-9 form (or, if they are a non-USA entity, a W-8BEN form). This form has their correct legal name, their type of entity (corporation, partnership, etc), their address, and their tax ID number. With this information, you can prepare their 1099 form. When you enter the vendor into your computer system, be sure to include its correct legal name (“Amazon Web Services, LLC”), not a nickname like “AWS” or “Amazon”, and input the tax ID number into the appropriate field in your accounting system.
The deadline for 1099s was January 31. It’s the middle of February, and I didn’t take care of this stuff yet. What do I do?
The forms aren’t due to the IRS until February 28. So just crank out the forms as quickly as you can, and mail them before February 28. It’s a good idea to mail the black copies of the forms to the service providers ASAP, and then wait a week or two (but not after February 28) so the service providers can tell you about any mistakes. And then you can fix the mistakes before sending the red copies to the IRS on February 28.
Do subcontracted employees get 1099s?
“Subcontracted employees” is a dangerous choice of words. Workers are either consultants (on form 1099) or employees (on form W-2). There is no such thing as a “1099 for an employee.” But that’s the topic for another column.
Disclaimer: This “Ask the accountant” article discusses general legal, tax and financial issues, but it does not constitute legal, tax or financial advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of appropriate professionals in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.
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