By Rayanne Buchianico, ABC Solutions, LLC
Many MSPs are using subcontractors or outsourcing IT services. In today’s gig economy, we have many options to outsource work, and there is no shortage of workers willing to take on the work. Working with outsourced labor comes with a lot of considerations. Over the next few articles, we will discuss various topics like securing your company and client data, managing the service desk, and today’s topic of annual reporting.
Welcome to 2020 where our clients are scattered around the globe and so are many of our workers. One recurring topic I hear every January is how to report payments to independent workers. Before we start down that path, we should define what an independent worker is. You can call these workers any of the following acceptable terms:
- Outside Services
- Independent Contractor
- Subcontract Labor
- 1099 contractor
One term you should never use when describing this type of worker is “1099 Employee.” If you have ever muttered that term, permanently remove it from your vocabulary. Nothing sets fire to the ears of an IRS agent faster than referring to your independent worker as an employee. Just don’t do it! The IRS has a process for determining whether a worker is an employee or independent. If you want to understand whether your independent worker would pass the test, find Form SS-8 in the IRS forms. The form consists of five parts with many specific questions, most of which center on control. Who has control? If you have control of the workers’ behaviors, finances, and hours, you likely have an employee.
Before I move on to how to report payments to these workers, I might suggest simply ensuring your independent workers have their own business entity. Make sure you are not their only customer. See to it that they have liability insurance and a worker’s compensation exemption. Get copies of these documents for your records. You never know when you will need to present it.
Now, let’s talk about Form 1099-MISC for these workers. I want to provide you with a clear understanding of the rules. You can find these rules on the IRS website in the instructions for the form, or continue reading here for a shortened, more friendly version of those rules. Many industries have different filing requirements for Forms 1099-MISC. I will focus our discussion on MSPs and the IT Community directly.
Who Must File Form 1099-Misc
Business payments made to a company or individual in excess of $600 in the calendar year must be reported to the IRS on Form 1099-MISC. If your business is taking a tax deduction for making the payments, someone is required to report that as income. There are many exceptions to this rule. Payments made to a corporation are not to be reported on Form 1099. This includes a Limited Liability Company (LLC) that is treated as a corporation for income tax purposes. Payments for merchandise including freight are also exempt from reporting. Please don’t send your distributors 1099s!
This next exception is a fairly new rule in the last few years, but it is extremely important. If you pay your worker through PayPal, a credit card, Venmo, or another merchant service, you are not to report this on a 1099. The merchant will report those payments on Form 1099-K and should not be reported by you. If you send a 1099 to your worker, and PayPal sends a 1099-K to that same worker, their income, according to IRS records, has just doubled. This may cause many problems for your worker. This same rule applies to UpWork, Guru, and Onforce. Those organizations collect your money and are responsible for reporting the payments to the appropriate authorities.
When To File
Forms 1099-MISC are due to the recipient by January 31 for the prior year. The IRS is getting stricter about this date as many workers rely on this document to file their own tax returns. If you are required to send workers a 1099, please do it early in January when possible.
Required Tax Identification Numbers
Some workers believe if they do not return Form W-9, they won’t have to pay tax on the income you paid them. Not true. You still must file the 1099 with the IRS even if you leave the tax identification number blank. When that happens, the IRS will respond that you are required to “backup withhold” taxes on all future payments to this worker. For every $100 you pay that worker, you will be required to withhold $24 and remit it to the IRS. Neither you nor your worker wants that to happen. Encourage them to complete the form. A good rule is to require a Form W-9 from every independent worker prior to sending them their first payment.
For foreign workers, your best option is to use a service such as PayPal or Venmo.
Failure To File
If you simply choose not to file the forms at all, you run the risk of penalty from the IRS. Although I have never actually seen the penalty enforced, it is clearly written in their instructions. If the forms are filed late, but less than 30 days late, the penalty is $50 per recipient. Over 30 days, the penalty increases to $100 per form.
A Few Final Thoughts
If you sent your 1099s in and realize you forgot one, you can send another batch separate from the first filing. The second filing will not negate the original one, it will be added to it. This is the only form the IRS does this for. All other forms require an amendment or a superseding return. If you sent a 1099 in the wrong amount, you can file a second form for that recipient and mark the “Corrected” checkbox at the top of the form. The forms filed with the IRS must be on Copy A and pink for OCR scanning. You cannot print forms from a website. Head over to your favorite office supply store or find a 1099 filing website to file them electronically.
About The Author
Rayanne Buchianico owns and operates ABC Solutions, LLC, an accounting, tax, and business systems consulting firm serving all industries and specializing in IT firms throughout the United States. She is also a partner in Sell My MSP, a listing service connecting interested buyers with motivated sellers of IT firms. Rayanne is passionate about nurturing the transformation in owners of small businesses who become more comfortable and savvier with the financial aspects of their business.