Taxes are confusing, to say the least. April 15th, for individual tax filers submitting their personal tax returns, has become a day of dread. And that’s just for the lucky people filing a few straightforward forms.
For businesses and business owners, tax day can be an even more daunting event. And it’s almost as if the IRS actually has a sense of humor, because the cutoff date for business tax filings is the last day of March, meaning that there’s even less time to prepare a greater amount of documents and moving parts.
When it comes to owning and operating a business, one of the most used sets of forms are the litany of 1099 tax forms. You might be familiar with the 1099-MISC, and for good reason. This is the document sent out to contractors and sole proprietors in order for them to use the information on their personal taxes. Your company might have even started out as a small consultancy and you received an avalanche of 1099-MISC forms at the beginning of each new year.
However, there are more 1099 forms than just the 1099-MISC, and your business might need to prepare many or all of them. To help you with your tax preparation, we’ve outlined each of the five 1099 documents as well as filing best practices.
1. 1099-MISC - Let’s start at the beginning and work our way down. The 1099-MISC form is the most common of the 1099 forms and is the easiest to understand. The 1099-MISC form summarizes all non-employee compensation and is what independent contractors use to calculate and file taxes.
Your business will need to prepare and send 1099-MISCs to any independent contractors who you worked with throughout the year. Remember, these are for third-party contractors and not corporations. If you work with a vendor that’s also a corporation, you don’t need to send a 1099-MISC.
2. 1099-INT - This is the form that’s used to summarize and file your company’s interest income throughout the year. So, if your company lent money to a person or organization in return for interest payments, you’ll need to file a 1099-INT. Additionally, if you operate as a financial services company or related FinTech business, chances are you’ll have a lot of interest income to file with this form.
Information from the 1099-INT is reported on Schedule B of your personal tax return. This means that even if you run a partnership or S-corp, it’ll be listed separately on your Schedule K-1.
3. 1099-DIV - This form is easy to understand in that it gets its name from its function. The 1099-DIV document is used to summarize any dividends, distributions, and capital gains for a given year. A form like this one is only filed if your company used excess cash to invest in financial instruments or something similar.
Again, this information, even though it pertains to your business, will be reported on Schedule B of your personal return. This is because, just like the 1099-INT, the 1099-DIV is listed separately on the Schedule K-1 and end up on your Schedule B.
4. 1099-B - Similar to the 1099-DIV, the 1099-B is a form responsible for income from investments. However, unlike the 1099-DIV, this form is concerned with the realized capital gain (or loss) from stock transactions throughout the year. The 1099-B, therefore, covers any income or loss from the sale of equity.
5. 1099-K - This form has become more prevalent over the years as the sharing economy and freelancing practices have grown. The 1099-K form is meant to catalog earnings your business made from PayPal, Airbnb, Upwork, and any other third-party money collection sources.
However, your company will only be sent a 1099-K if you had sales over $20,000 from a third-party service and had a minimum of 200 transactions. You’ll get this form if you sell product on eBay, Etsy, or Amazon, for example.
Preparing to File Your Tax Documents
Before you file all your tax forms, make sure you have all your ducks in a row to avoid mistakes, and therefore, tax problems. Addressing key elements of your tax information early and often will help you file the correct forms and numbers.
First, make sure you’ve collected W-9 forms from all the independent contractors you paid throughout the year. This will help you send the correct 1099-MISC forms to the right people.
Second, if you worked with any international partners, makes sure you have their information so you can prepare a W-8 BEN form on their behalf. This allows you to issue a 1099-MISC form to an international person and ensures your taxes are filed correctly.
Finally, close your books as soon as you can and begin preparing the annual financial statements early. This ensures that you can verify the information and ensure all the data is accounted for and valid.
And of course, always consult a tax professional prior to filing your business taxes. We may be smart, but it’s always best to engage an expert in the tax space for more information.