BUSINESS KNOW-HOW: Giving and Getting 1099s

The self-employed version of the W-2 is the 1099. Any individual or
company that paid you $600 or more in the previous year is required by law
to report that payment to you and to the IRS by Jan. 31 via a 1099 Misc.
form.

Enrolled agent, tax preparation service owner and ASJA member Joseph
Anthony offers good advice for those who are gathering these documents,
and he also some wisdom for those who must send them out.

• Pay Attention. When you get a 1099, remember that the government gets a
  copy too, so you
  can't ignore it or lose it. Look it over as soon as it arrives, and
  compare it to what you think you were paid. If there is a discrepancy (and
  plenty of writers have discovered some), figure out why. Don't assume the
  government won't notice. "The IRS computer system is still pretty
  inadequate. But the program that matches 1099 and other third party
  documents is much better than it was five years ago," Anthony says.
• What If It's Wrong? Sometimes the 1099 is just plain wrong. Anthony
  points to a client who received a 1099 that had an extra 0. The company
  claimed to have paid the writer $64,000 instead of $6,400. The writer
  ignored the error and about a year later, she received a bill from the IRS
  for $30,000 in tax, penalties and interest. Anthony got the issuer of the
  1099 to admit its error and sent that documentation to the IRS, and the
  bill went away. But fixing problems like this right away lets you avoid
  the aggravation down the road. Contact the client's accounting department,
  and get them to send out a corrected 1099. Keep records of the
  correspondence in case the IRS doesn't get the correction.
• What If It's Not Quite Right? Sometimes the 1099 isn't incorrect from
  the standpoint of the issuer. They may have included payment for items
  that you don't consider income - like reimbursement for expenses. Let's
  say you were paid $1,000 for writing a story and reimbursed for $1,000 in
  travel expenses. The 1099 arrives saying you were paid $2,000. Anthony
  says report the $2,000 in income and take all the deductions to which you
  are entitled, including the travel expenses for which you were reimbursed,
  as well as other costs of doing the assignment. Because you subtract these
  direct expenses from your income, it will all even out in the end.
• What About End-of-the-Year Income? When a client sends the 1099 at the
  end of the year, it reflects payments right up to Dec. 31 - but you may
  not have received the last paycheck until January of the next year. You
  can legally handle the discrepancy two ways, Anthony says. You can choose
  report the income and then subtract it out as an expense adjustment on
  Part 5 of Schedule C "Adjustments for income received in 2004." But be
  sure to actually report the income next year, Anthony warns; otherwise,
  you're begging for trouble.
      A better option: Ignore the discrepancy, include it as 2003 income, and
  pay taxes on it when you turn in your income tax form in April. "All other
  things being equal, including your income and circumstances, you might as
  well pay the tax in the year the 1099 says it's owed," Anthony advises.
  "It cuts down on the possibility that you'll be questioned." The only
  reason not to go this route is if you expect your circumstances or income
  to change radically next year; then you might want to declare the income
  on next year's tax form.
• What if you don't get a 1099? Does that mean you're off the hook, and
  it's free money? Bad conclusion. That's fraud, and tax fraud is a felony.
  Honesty as the best policy. Bargaining with the government - "I'm not
  reporting everything, but I'm only taking part of the deductions" -
  doesn't work. "If you earned it, report it. Then take every penny of the
  deductions to which you are entitled. You're probably going to come out
  ahead in the end, and you are for sure going to sleep better," Anthony
  says.
• When Should You Send a 1099? If you've subcontracted work to someone
  else and paid them more than $600, you have to send them, as well as the
  IRS, a 1099 - unless your subcontractor is incorporated. Corporations
  aren't required to receive 1099s, although if you do send one to someone
  who's incorporated, it's not a problem.
       When you first subcontract work to someone else, it's always a good idea
  to get their Social Security or tax identification number, along with his
  or her address. Then when it's time to send them a 1099, you'll have that
  information along with the amount that you've paid them. Otherwise, you'll
  have to track down that information. But what if it's a little business
  that has disappeared, and you don't know the I.D. numbers or even the
  address? Or what if you send out the 1099 and it bounces back as
  "addressee unknown"? Anthony advises doing the best you can - sending the
  1099 to the government and keeping evidence that you tried to send it to
  the sub. "You've made your best effort, and you have sent a copy onto the
  IRS. You've done what you are supposed to do," he says.
• How Do You Send a 1099? You can't download a form 1099 Misc from the IRS
  site, but you can download instructions and order the form by phone or mail at
  http://www.irs.gov/pub/irs-pdf/f1099msc.pdf or by calling 1-800-TAX-FORM.
  Another easy, do-it-yourself way is by using a service. A reliable one is
  http://www.filetaxes.com. Fill out the information online, and
  filetaxes.com will send paper forms to the IRS and your vendors for $3.50
  each. Or get your accountant to do it for you.