What is the maximum amount I can pay to an individual for services before I must file a 1099?

What is the maximum amount I can pay to an individual for services before I must file a 1099?

 

Answer: Independent contractors pay their own payroll taxes and insurances, including workers’ compensation, and are not covered by many labor laws, so the financial and administrative benefits of having a workforce composed of independent contractors can be significant. However, it is crucial for business owners to understand that independent contractor status is not an arbitrary election but is based on the job structure. It is also important to understand that independent contractor status cannot be established or supported by the completion of any particular forms or tax paperwork (like Form 1099-MISC), the drafting of a carefully worded offer letter or an independent contractor agreement, a piece work, commission, or other performance-based compensation method, or by part-time, seasonal or other short-term work arrangements.

 

As to the Form 1099-MISC filing requirements, under current tax law, businesses report cash and check payments for services rendered by non-corporate vendors, such as qualified independent contractors, on Form 1099-MISC, which is filed annually and, in the case of services, only when payments total $600 or more during the calendar year. Businesses are required to provide non-corporate vendors with copies of Form 1099-MISC for the preceding calendar year by January 31st. Copies of Forms 1099-MISC also must be submitted to the IRS and certain state taxing authorities for the preceding calendar year by February 28th (March 31st if filed electronically); however, most states obtain their 1099 information through data sharing arrangements with the IRS. Forms 1099-MISC submitted to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Forms 1099-MISC and 1096 must be submitted to the IRS electronically or using machine readable (optically scanned) forms that you can order directly from the IRS at 1-800-TAX-FORM (1-800-829-3676). You can find and review Forms 1099-MISC, 1096 and the filing instructions at the following IRS websites:

• IRS Miscellaneous Income Forms
• Instructions for Form 1099-MISC: irs.gov
• Form 1096 – Annual Summary and Transmittal of US Information Returns: irs.gov

It is important to note that beginning with the 2011 tax year, businesses only report cash or check payments on Form 1099-MISC. Payments made by credit or debit cards as well as those made through third-party networks such as PayPal, Amazon.com and Google are reported by the payment processors on new Form 1099-K. You can review the changes at the following articles:

• Understanding the New Form 1099-k: fusiontaxes.com
• Reporting Requirement for Merchant Card Third Party Network Payments: bkd.com
• 1099-K Reporting Requirements for Payment Settlement Entities: irs.gov
• Form 1099-K Merchant Card and Third Party Network Payments: irs.gov

However, the regulations contain an “aggregate payee” rule that requires companies who accept credit or debit card payments and third party network payments for other parties who work for them as independent contractors to report those payments on Form 1099-K. You can review Form 1099-K and its instructions at the following websites:

• Payment Card and Third Party Network Transactions IRS Form: irs.gov
• Instructions for Form 1099-K: irs.gov