Bringing on contractors can be a great leap forward for a growing company in its early days, but they can also be ticking time-bombs of bureaucracy if they’re not handled in an IRS-approved way. 1099s can be especially tricky. Who gets them? And how?
Who Got the Money?
Let’s begin at the beginning. Many small businesses that do their own taxes or pay Uncle Vinnie to do it are under the impression that if their payments went to an LLC they don’t have to report it on a 1099. Wrong. Except for corporations, just about every non-employee that does work for you, including your business attorney, has to get a 1099 — if you’ve paid them $600 or more.
It works this way: When you have an LLC, any money your company receives is viewed by the government as going directly to you and your partners. They call it a “pass through.” The LLC doesn’t pay the taxes; you do when you file your 1040 as an owner or “manager.”
If you deducted those payment expenses when you filed your taxes, the IRS wants to know who got the money. A very efficient IRS computer matches up the 1099 you sent to the guy you paid and looks to see if he declared that income, just like the W-2s you got when you had a real job. And don’t worry: the government will notice if you haven’t sent one out. The IRS rather nastily reminded me once that I had forgotten to include a 1099 for $59. It was an honest oversight. The fees can get steep, honesty or no:
If you sent in the form within 30 days of the Jan. 31 deadline, the fine is $50 for each late form.
After 30 days but before the Aug.1 deadline, the penalty is $100 for each failure.
And if you don’t send out your 1099s by Aug. 1, 2017, you’re on the hook for a $260 IRS penalty for every one missed.
In other words, if you hired 10 independent contractors and freelancers for your company and you didn’t send the 1099s to them (and the government) by Aug. 1, you could be looking at a $2,600 fine.
But take heart. There is some wiggle room.
The Government Is Willing to Hear You Out
The government has to establish penalties when you don’t file properly (or on time). Otherwise, nobody would. But what it really wants are the money reports. Who got how much, from whom, and when. Give the IRS a call (304-263-8700) and ask. Or on the IRS site, check out Section O of “General Instructions For Certain Information Returns”, which outlines the penalties and deadlines. You’ll notice a paragraph that says:
“The penalty will not apply to any failure that you can show was due to reasonable cause and not to willful neglect. In general, you must be able to show that your failure was due to an event beyond your control or due to significant mitigating factors. You must also be able to show that you acted in a responsible manner and took steps to avoid the failure.”
There’s room there. The important phrases are “due to reasonable cause and not to willful neglect” and “acted in a responsible manner.” If you’re late on your 1099s, go make your best case and see what happens. Certainly worth a try. Part of running a business is learning to make smarter mistakes, after all.