Did you as a small business pay another person or unincorporated business more than $600 total in the last year? You may have to provide them a 1099-MISC form.

Here are the specific rules as laid out in the official IRS Form 1099-MISC Instructions [pdf]:

The Internal Revenue Service (IRS) requires businesses (including not-for-profit organizations) to issue a Form 1099 to any individual or unincorporated business paid in excess of $600 per calendar year for services rendered. This is required whether these payments are spread out over the course of the year or are paid in one lump sum payment. The most effective way to obtain the information needed to prepare the Form 1099 is by requiring that an IRS Form W-9 be completed prior to any payment being made. The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.

Note that last sentence: The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.

The 1099-MISC forms must typically be sent out to independent contractors by January 31st following the end of the tax year in which you made the payments. You must also file a Form 1096 and submit the information to the IRS by March 31st.

If you’ve got your own accountant or payroll service, then you can pay them to generate the proper forms and send out these 1099s. However, I have done it myself as well, as it is not very difficult. Here are your options for generating and issuing a Form 1099:

• You can order physical, blank 1099 forms from the IRS for free, but it may take 10 business days or longer (2+ weeks) to arrive. (It look closer to a month for me!) Here is the IRS.gov order page. You’ll need at a minimum, Form 1099-MISC and Form 1096. You then fill out and print both forms yourself and mail it out. Cost: Free.
• You can order physical, blank 1099 forms online or from an office supply store. Here is the top-reviewed blank 1099-MISC kit from Amazon.com which includes multiple copies, envelopes, and 1096 forms. You then print it out yourself and mail it. Cost: ~$22 shipped for a kit of 25. You can get it with the printing software for about $35 shipped. This alternative brand includes online e-File instructions for about $16.
• You can use a 3rd-party online service where you fill out the information online and they’ll create a PDF for you. The most popular is Intuit’s version (they make TurboTax). You will still need to print it out and mail the 1099 forms to your independent contractors, but they will e-file the information to the IRS. Cost: ~$15 for up to 3 forms, $4 each additional.
• You can use 3rd-party tax prep software for businesses where you will be guided as with tax software as to how to fill out the appropriate forms. The most popular is TurboTax Business (not the personal edition), which will help you file your return and also generate both 1099-MISC and W-2 payroll forms for you. It comes with a 60-day money back guarantee from Intuit, so if it doesn’t work to your satisfaction, you can return it within 60 days for a full refund. Cost: ~$105 for tax filing software which includes unlimited 1099 and W-2 forms.

The easiest way would be to use a computer printer, but of course the IRS doesn’t make it that easy. In order to get the numbers “set” correctly for printing, you could be one of many free homemade templates out there (although I can’t vouch for any specific one as they may contain viruses or malware, etc). You can also buy forms + software packaged together to fill them out. Don’t forget to fill out the red copies for the IRS.

You can also fill out the official physical forms with a typewriter, or you can even handprint if you follow the IRS directions very carefully. Note that you cannot use the blank 1099 PDFs that you find online; they are only examples.

Finally, remember that your first job is to get a W-9 form [pdf] filled out by the person you paid, so that you’ll have their Tax ID to enter onto your tax forms.

Reminder for last quarter of 2013. If you’ll earn income outside of your W-2 paycheck this year, you may need to send the IRS some money before the usual tax-filing time. Here are the due dates for paying quarterly estimated taxes in 2013; they are supposed to be in four equal installments. This is for federal taxes only, state and local tax due dates may be different.

* You do not have to make the Q4 payment due January 15, 2014, if you file your 2013 tax return by January 31, 2014.

Who needs to pay estimated taxes?
In general, you must pay estimated tax for 2013 if both of the following apply:

1. You expect to owe at least $1,000 in tax for 2013, after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of
   • 90% of the tax to be shown on your 2013 tax return, or
   • 100% of the tax shown on your 2012 tax return. Your 2012 tax return must cover all 12 months.

If you forget to pay (like I’ve done before), then you should make a payment as soon as possible even though it is late. This will minimize any penalty assessed. This is all taken from IRS Form 1040-ES [pdf].

How do I pay?

• By check. Fill out the appropriate 1040-ES voucher (last page) and send to the indicated address. If it is postmarked by the due date, the date of the U.S. postmark is considered the date of payment.
• By online bank transfer. You can link your bank account and pay via electronic funds transfer at EFTPS.gov or call 1-800-555-4477. No convenience fees. It takes a little while to set up an online account, so plan ahead.
• By debit or credit card. Here is page of IRS-approved payment processors. Pay by phone or online. Fees will apply.

I usually pay online at EFTPS.gov for both convenience and to avoid fees. In rare cases with the right credit card promotion, it can be worth it to pay the credit card processing fee. For example, last year I paid taxes with my Chase Ink Bold card. I paid $189 in fees, but earned $500 of bonus points.

I just received the following e-mail from Half.com, where I occasionally sell used books:

We’re writing to let you know that starting with transactions occurring on or after January 1, 2011, new Internal Revenue Service (IRS) regulations require Half.com (and other businesses that process payments) to file a Form 1099-K for all sellers with more than 200 transactions and $20,000 USD in sales per year.

If you’re a high-volume seller who has met or is close to meeting the IRS thresholds, we may need to generate a Form 1099-K for you. If you have multiple accounts, we’ll take all of them into consideration when calculating your volume status. If you exceed the IRS thresholds, we’ll send your first Form 1099-K to you in early 2012. Your Form 1099-K will give you a consolidated report of all payments received through Half.com for 2011. This information will also be reported to the IRS.

Apparently, as part of new legislation designed to help track down (and tax) unreported income, starting in 2011 any credit or debit card payment processor with clients that have more than 200 transactions and $20,000 in sales per year must file a 1099-K with the IRS.

In addition to Half.com, this also includes individual sellers using services like PayPal and Amazon.com. Perhaps also sites like Etsy and Zazzle? This won’t affect me, but I think it’s a pretty good idea. I do feel that lots of eBay income goes unreported, and the limits are reasonable. If you’re clearing 200 transactions and $20k in payments, you should be tracking your income and expenses like a business. This 1099-K won’t really matter as it just reports gross amounts.

I’m more scared about the upcoming changes in 2012 that says that a business has to file a 1099-MISC for any person or business it pays more than $600 in a calendar year. Corporations are no longer exempt. That’s a ton of 1099 forms swirling around. I’m going to have to send W-9 forms to everyone from Staples to my web hosting company. I still hope they’ll change this rule before it goes into effect and swamps tons of small businesses.

More info: CNN Money, Journal of Accountancy, Stop1099.org

I got a lot of positive responses from my self-employed tax-related post yesterday. I’ll be happy to continue sharing more of my experiences, but given the complexity of tax issues I wanted to throw out a book recommendation – Home Business Tax Deductions: Keep What You Earn by Fishman.

This is my hands-down favorite book on tax deductions for those with home-based businesses. It has saved me many times the $20 cover cost. I checked this book out from the library first as well, but ordered it online within a few days. I’ve read several other tax books and they are either (1) too light on the details, or (2) too aggressive and bordering on both the unethical and illegal. This book provides a good summary of the IRS code, and practical ways to substantiate deductions that you qualify for.

The primary benefit of a good tax book is that it gives you the confidence to take the deductions that you deserve and qualify for. Many times people simply don’t try because they are afraid of the Big Bad Audit. Instead, I am now confident that I followed the rules and can pass an IRS inspection. Remember the difference between tax avoidance and tax evasion:

Tax Avoidance is perfectly legal. The courts have stated clearly that you have no duty to pay more taxes that what is minimally required by law. You have every right to take all legitimate deductions and also to structure your business to minimize taxes.

Tax Evasion is a crime. This involves fraud, misreporting income, or taking deductions that you do not qualify for.

(Is it tacky to quote yourself?) Even if you have an accountant, I think it is good to understand a bit of what is going on.