Wednesday, January 30, 2013
Do I Need to Issue My Subcontractors a 1099?
"Do I need to issue my subcontract resume writers a 1099 form?"
If you use subcontractors in your resume writing business (or you've paid referral fees to any one resume writer in excess of $600), the answer is probably yes. And you'll have to act fast, because you must issue 1099 forms by Jan. 31.
Working with other resume writers can be a double-edged sword. On the one had, you can work with more clients than you can by yourself. But on the other hand, you have to deal with the extra tracking and bookkeeping. And come tax time, that means staying in the good graces of the Internal Revenue Service.
I'm going to use the general term "subcontractors" throughout the rest of this article, but the same principle applies to any resume writer who you pay more than $600 a year for services.
How the IRS Defines Subcontractors
Since your subcontractors aren't employees, you are not expected to withhold taxes from their payments. You simply pay the agreed-upon amount, and he or she is responsible for his or her own tax reporting.
But there is a catch.
Not only does the IRS want to know from the subcontract resume writer how much he or she earned, but they also want to know from the vendor (that's you) how much he or she paid to each subcontract resume writer. That's where form 1099 comes into play — but only if your subcontract writer meets certain criteria.
When is a 1099 Required?
On the surface, it's pretty easy to determine when to issue a 1099-MISC. If you pay a subcontractor (or other resume writer) more than $600 in a single calendar year, a 1099-MISC is required. The only exceptions to that rule are if you and/or your subcontract writer do not live in the United States, or if your writer's business is a corporation. Sole proprietors, LLCs, and partnerships are all subject to the 1099-MISC rule, provided the $600 earnings threshold is met.
The PayPal Gray Zone
If you pay your subcontract writers via PayPal payment, and you've made more than 200 payments (totaling in excess of $20,000), PayPal will ALSO be issuing a 1099-MISC to the IRS for your transactions. What that means for your subcontract writer is that they are potentially being reported twice — once by you, on a standard form 1099-MISC, and once by PayPal, on the new 1099K. You can see how this could cause some confusion, not only for you, but for the IRS as well.
To 1099 or Not?
If your subcontractor lives in the United States and earned more than $600 in payment from you during the year, he or she needs a 1099 form. As with all things involving taxes, however, it's probably best if you seek the advice of a qualified tax professional, rather than risk getting into hot water over missing or incorrectly filed forms. But do it today … since the deadline is tomorrow.