In an effort to curb "under the table" work – work performed by contractors and other non-employees that often goes untaxed – the IRS created the 1099 program in the 1980s. Under the program, the IRS can run matches using Social Security numbers and tax ID numbers to catch people who receive interest or dividends, perform services or collect rents but don't report the income.
According to an article published by Patti Spencer in the Lancaster Intelligencer, the 1099 program is considered one of the IRS' most successful enforcement programs. The article outlines many of the common types of 1099 Forms and their uses.
The common types of 1099s that businesses handle include:
- 1099-INT: Allows businesses to report interest payments
- 1099-DIV: Allows businesses to report dividend payments
- 1099-MISC: Allows businesses to report payments made to individuals as well as rent, prizes, and other income
Form 1099-MISC is the most common 1099 document handled in accounts payable. Businesses must report payments of $600 or more made to people not considered employees on Form 1099-MISC, a copy of which is provided to the individual as well as the IRS. Recipients of 1099s must report the amount as income on their tax returns and pay income and self-employment tax on the earnings.
"If you are a business, you are obligated to issue 1099s if you make reportable payments in the course of your trade or business," Spencer says, adding that personal payments (such as payments made to your personal lawn care service) are not reportable.
If you are unsure if a payment is 1099 reportable, Spencer recommends having the vendor fill out a form W9. Form W9 is a request for a vendor Taxpayer Identification Number, which contains the vendor's name, social security number, and TIN.
The following organizations typically receive 1099s:
- Single-member LLCs
- Corporations (only if expense is medical, health care, legal, or fishing related)
Spencer also says businesses are required to issue 1099s by Jan. 1 of the preceding year, with a Form 1096 with the same information going to the IRS.
"What happens if you don't send a 1099-MISC," she asks. "You could lose the deduction and owe the IRS a $50 penalty for each 1099 you didn't file. Depending on the extent of the failure and the reasons, some [businesses] have been liable for tax fraud."
The full text of this article was published October 2007 in the Lancaster Intelligencer. The article is no longer available on the newspaper's online archives.