Any business that has employees and/or independent contractors must end the year with another small mountain of paperwork to climb. Let’s talk about what forms you must file once the year is over.
I call these “payroll information forms” or “payroll information returns” rather than “payroll tax forms” or “payroll tax returns” because these forms do not require that a payroll tax payment be made. The forms I’m about to explain are required by the IRS, but they are for informational purposes only. Their purpose is not to report payroll tax liabilities; their purpose is to report payroll-related information.
Let’s categorize these payroll information forms into 2 categories based on who receives the form:
Category #1 – For employees.
Form W-2 must be sent to each employee of your business by January 31. You are probably very familiar with Form W-2. It reports many important pieces of information that the employee needs to file his personal income tax return, such as gross wages, federal income tax withholdings, social security and medicare tax withholdings, and state and local income tax withholdings. It can also include things like retirement plan contributions and other employee benefit information.
Here’s something else that you must know: not only do you send the Form W-2 to each employee, but you must also send copies of Form W-2 to the Social Security Administration, along with a special form called a Form W-3.
Finally, you may also be required to send a copy of Form W-2 to your state, along with some type of summary report like the federal Form W-3. States vary on the requirements for filing Form W-2, so be sure to check with your state to find out what you need to do.
Category #2 – For non-employees.
By “non-employees”, I’m referring to self-employed people (aka “independent contractors”) who have provided a service to your business. The form I’m talking about here is the infamous Form 1099-MISC, often referred to simply as a “1099”. Like Form W-2, you must send out Form 1099-MISC by January 31.
Unfortunately, the rules for 1099’s are very complex. There’s a long list of general rules, exceptions to those rules, and all manner of finer points. If I tried to answer the simple question, “Who is supposed to receive a 1099?”, we’d be here all day, because the instructions for Form 1099-MISC are 8 pages long. That’s enough rules to make anyone’s head spin.
So for now, let’s just start with some of the basic rules. And by “basic”, I mean the rules for the most common use of Form 1099-MISC, which is to report “non-employee compensation” that gets reported in Box 7.
When it comes to Box 7, there are two basic rules that are somewhat easy to understand:
1. Report payments made to an individual when the annual total is $600 or more.
2. Report payments made for services rendered to you in the course of your trade or business. You do not have to report personal payments. For example: you can forget about payments to your electrician or plumber who performed services in your home. But if you hire an accountant or attorney to do work for your business, and the annual total is $600 or more, then you may be required to give a 1099-MISC to that service provider.
Of course, there are many exceptions to the 2 general rules mentioned above. Here are a few:
1. Generally speaking, do not issue a 1099-MISC when payments are made to a corporation. Sole Proprietors, independent contractors, and self-employed people are the folks the IRS is trying to keep an eye on here. So if your accountant runs his business as a corporation, you don’t have to give him a 1099, even though you paid him more than $600 for services rendered.
2. Generally speaking, do not issue a 1099-MISC for payments for merchandise. The main concern is services rendered not products sold.
3. Do not issue a 1099-MISC for payments of rent to real estate agents.
4. Do not issue a 1099-MISC for payments of wages to employees. Obviously, those go on Form W-2.
We could go on and on with exceptions to the exceptions. It really is mind-boggling. Keep in mind that this is just an introduction to the wild and wacky world of 1099’s.