For many businesses it is a necessity to hire contractors to ensure some jobs get done, but tracking payments to service providers properly can quickly turn into a tax compliance nightmare.
The American Accounts Payable Association offers the following 1099-MISC preparation tips to ensure your tax reporting for 2012 is correct.
1. Form 1099-MISC required for noncorporate service providers.
If you paid any service provider (sole proprietors and partnerships) at least $600 for services during 2012, you must provide Form 1099-MISC to them no later than Jan. 31, 2013. If the provider is a corporation you do not have to provide Form 1099-MISC.*
*You must provide Form 1099-MISC to attorneys or medical service providers who do business as corporations. To find out if a service provider is a corporation, have them complete IRS Form W-9, Request for Taxpayer Identification Number and Certification.
2. Be on time. If you're sending your Forms 1099-MISC to the IRS by mail, you must mail them no later than Feb. 28. If you're sending an electronic file, you must file it by Apr. 1 with the IRS.
3. TIN truncation extended. The IRS has issued regulations to extend and expand on the Taxpayer Identification Number (TIN) truncation pilot program for 1099s. The regulations would create a truncated taxpayer identification number (TTIN) for use on electronic and paper payee statements. Under the truncation procedure, the first five digits are replaced with either asterisks or Xs: ***-**-1234 or XXX-XX-1234.
4. No 1099 needed for electronic payments. If you paid for services with a credit card, debit card, gift card or another electronic payment medium (e.g., PayPal), you're no longer required to send service providers a Form 1099-MISC. The bank or credit card company that made the actual payment will send the contractor Form 1099-K.
5. When in doubt, send a 1099. If you are unsure whether a Form 1099-MISC is required, go-ahead and send one. You set yourself up for penalties if you do not send all qualified service providers their Form 1099-MISC.