The easiest way to avoid the headaches and potential penalties caused by issuing 1099s to independent contractors is to structure your activities to:
(1) minimize the number you have to issue, and
(2) prepare in advance if you do have to issue them
Strategy 1: Select Contractors That Operate as Corporations
Your business does not have to report payments made to corporations, including S corporations, on Form 1099-MISC (unless the corporation collects attorney fees or payments for health and medical services). This rule also applies to LLCs that elect corporate status for federal tax purposes.
If all your independent contractors are corporations or LLCs taxed as corporations for federal tax purposes, you have no 1099 filing requirements. Period!
Strategy 2: Make Payments by Credit Card or Third-Party Payment Networks
Don’t report payments made via credit card and other third-party payment networks like PayPal on a Form 1099-MISC. Credit card companies and third-party networks report these payments to the contractors on a Form 1099-K.
Strategy 3: Always Get a W-9 Up Front Before Making Any Payments to the Contractor
By getting the W-9 up front before you make a payment to the independent contractor, you guarantee several things:
You know whether you have a 1099 filing requirement for the independent contractor, because he, she, or it discloses the business type to you.
You know whether an LLC is classified as a corporation for federal tax purposes and, therefore, excluded from 1099 reporting.
You won’t have to chase the contractor down next year for the required information if you have to file a 1099. Once you’ve paid the contractor, your leverage for the 1099 information is gone and the contractor might not give you the information you need.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX are generally unaware of even the basic tax compliance requirements and may find themselves facing IRS penalties.