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By Vonmarie Thomas of Breakaway Bookkeeping + Advising
You are here for the music, but you can’t ignore the business side of your art.
And as it’s becoming clear for all Americans this time of year, part of that includes doing your taxes and making sure you are accurately accounting for all of your lyrical liquid.
One of the most important documents you be familiar with is the 1099 — the pesky little form that businesses need to fill out, in order to report payments made to non-employees. There are several different types of 1099 for different types of payments, so let’s dive in.
1099s and setting up proper contracts with any vendors and contractors are a big part of doing business. However, come April 30th you’ll need to have done more for your financial records than just taxes. 1099 reporting is required as well. It’s to inform the IRS the amount of money you have paid the people and businesses with whom your business has worked.
The IRS ensures that individuals and businesses are reporting their income and informing them of income that may have not been subject to withholding taxes. For example, if you hire an assistant to organize your headphone collection or a friend to help DJ at an event, and pay them $600 (by direct electronic payment, check or cash) or more during the year, your business would be required to file a 1099-NEC with the IRS and also provide a copy to the assistant or friend.
1099 forms are required by the IRS to show the payments made which may be subject to withholdings. Withholdings are the amounts of federal taxes withheld from your paycheck. At a traditional 9-to-5 where you are paid as a formal employee by one employee, your employer would take a portion of your earnings from the paycheck and pay taxes with that portion — withheld from your recurring check. In these cases where the person you have hired is not a full-time employee and you did not already withhold payment from them for tax purposes, you would issue them and the IRS a 1099-MISC or 1099-NEC.
Whether you are filing the 1099 yourself or enlisting help from a bookkeeper or professional tax professional, you also must make sure to have all the documentation required to complete the form. The 1099 is just one of many types of documentation you may need for operating your business — the most critical forms for you to know are 1099-MISC, 1099-NEC and W-9.
Why are these forms so important? There are several key things about these forms that you should know to file your taxes correctly.
What Is Categorized as Needing a 1099?
As shared above, the 1099 is an IRS form that is used if your DJ business is designated as an LLC, partnership LLC, sole proprietor, corporation or partnership to record the total amounts paid to an external vendor. Many things fall into this category, such as marketing services, DJ consultant, lighting equipment rental, a lawyer, or accountant/bookkeeper.
The two kinds of 1099 forms you would choose from are 1099-MISC and 1099-NEC. The IRS advises that 1099-MISC should be used for rent paid or medical and healthcare payments. “MISC” stands for “Miscellaneous.”
A 1099-NEC would be used in a situation where you have hired a vendor or non-employee such as a lawyer or accountant. NEC stands for “Non-employment compensation.” If you contracted a consultant, then 1099-NEC is the right form for you.
Be sure to make duplicate copies: You are required to issue a copy of 1099-NEC to both the IRS via your taxes and the vendor that you worked with. Depending on the state in which the vendor is located, you may have to send the state a copy of that 1099 as well.
What if I am issued a 1099-NEC?
You’ll receive 1099-NEC if you’ve made $600 or more in payments (which is cash basis) to a vendor that does not have an S-Corp or C-Corp tax designation or relates to an attorney (when it comes to legal fees the 1099- NEC is sent no matter the corporate designation).
If you ever receive a 1099-NEC yourself, you would include that in your own tax filing to the IRS and include business expenses incurred to apply against that proof of income or 1099-NEC. Consult a bookkeeper or tax professional for the details on this filing as it requires a tax preparer ID unless you are filing it personally for yourself.
Issuing a 1099
There are other times in which you would send a 1099 regardless of tax designation for other things which may not apply to your business like rent, prizes and awards, other income payments, generally the cash paid from a notional principal contract to an individual, partnership, or estate, any fishing boat proceeds, medical and health care payments, crop insurance proceeds, gross proceeds paid to an attorney, Section 409A deferrals, or non-qualified deferred compensation.
More guidance on this can be found on the IRS website.
How Do I File?
If you are in a budget crunch or have more than one day’s worth of work regarding 1099 filings, it may be time to hire a professional. Accountants, bookkeepers, and tax professionals are happy to help — but if you feel comfortable you can file yourself too without a professional’s help. If you choose to file yourself, be sure to use your current accounting software like Quckbooks, TurboTax, or an online 1099 filing site like Tax1099.com.
If you’re dealing with multiple 1099 forms, it will likely be more efficient to engage with a professional. They can save you headaches, save you time, save you from deciphering every detail of the tax code yourself and leave you time to do what you love most, make music. Remember that any business related services may count as a deduction or write-off! 😉
What Is a W-9?
Another form you will need is the W-9. This form is for identifying the vendor details you would need in order to file the 1099.
First, identify the vendor’s headquarters’ location. This will be printed on the W-9 form they will provide to you. You will need to file this regardless of whether you are registered as an S-Corp, C-Corp, Partnership, or LLC with a sole proprietor, Partnership, S-Corp or C-Corp designation. It is important to collect a W-9 along with a working agreement early in the relationship.
Also be wary of due dates, 1099s are due by January 31st every year, rather than with your taxes. If you’re late on this, filing sooner than later is better as there are fees associated with late submissions that build up over time.
See the below W-9; all of the highlighted fields are all of the information you should have for each vendor: business entity name, the contractor’s name or DBA name (“doing business as”), TIN (this is the Tax ID of the business entity or the social security number of the sole proprietor and your tax ID), the federal tax designation box which the company has reported to the IRS, an address, a signature and date at the bottom of the W-9.
Pro Tip: Make sure you have the phone number and email address for the person to whom the 1099 pertains. You will be able to file the form electronically without an issue as well as hard-copy by mail.
If you have international vendors, it is important to also keep an international version of the W-9 which is a W-8BEN for individuals or a W-8BENE for business entities. Within the IRS W8 guide for international vendors, it states:
“If you receive a Form W-8 that you can reliably associate with the payment and are permitted to rely upon (generally under the standards for foreign status claims for chapter 3 purposes), you are exempt from reporting the payment on a Form 1099 and withholding under section 3406.”
In other words, vendors that submit a valid W8 form do not require 1099s to be reported. The IRS requires non-resident alien data to be collected for individuals to be excluded from experiencing a 30% tax withholding rate in the US. For specific questions regarding W8 treatment internationally, please speak with a tax professional.
All set for April 15th!?
There are many 1099 forms, each with their own special purpose, and sometimes it’s tricky navigating the 1099 waters, but there are resources out there to help — whether you’re filing on your own or with help. Either way, don’t be a tax rebel, folks. Make sure to file your 1099s correctly and on time, and let the good times roll!
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Vonmarie Thomas is an advisor at Breakaway Bookkeeping + Advising with a decade of experience in financial reporting and full cycle accounting. Vonmarie is dedicated to helping her clients plan for and maintain successful long-term budgets. She often works with entrepreneurs, freelancers and solo practitioners from a wide variety of industries including music producers, disc jockeys and creatives.