How to prepare 1099 for a contractor

The Internal Revenue Service requires you to prepare a Form 1099-MISC for a contract worker if you paid the person more than $600 during the fiscal year. This $600 figure includes all trade or business-related payments, including money you gave a contractor for materials and parts unless the materials and parts were broken down separately on your contractor’s invoice. You cannot give a 1099 form to a worker who is an actual employee of your company.

Obtain a Form 1099-MISC from the IRS or another reputable source. You can ask the IRS to send you the necessary form by calling 1-800-TAX-FORM (1-800-829-3676) or by going to their online order page.

You can also purchase 1099-MISC forms at your local office supply store, although most only come in sets of 25 or 50. They are perfectly compatible with IRS scanners.

Note: You cannot simply download a 1099-MISC form from the Internet or the IRS sample page and use it to fill out the information. The Form 1099 you send to the IRS must be readable in its scanners. If you send the IRS an unsanctioned Form 1099, you could face a penalty.

Fill in your federal tax identification number in the appropriate box. This is your social security number or employer identification number, depending on your business structure. If you don’t know your federal tax ID number, find out how to get it here.

Complete the worker identification field using their tax identification number. This could be their social security number, tax ID number, or employer ID number. When you hired the contractor, you should have asked them to fill out a W-9 form. In addition to the person’s address information, the W-9 will tell you the identification number used for tax purposes.

If the contractor doesn’t give you their Form W-9 or provide a tax ID, the IRS expects you to start withholding taxes on their behalf. You are expected to withhold 28% of contractors’ pay and then remit it to the IRS.

Enter the amount you paid the contractor throughout the year. This information is found in Box 7. Box 7 should be titled “Compensation of non-employees”.

Write down any amounts you deducted from their pay. Indicate the amount of federal or state tax you withheld from the contractor’s salary in box 4. Since you worked with an independent contractor, it is unlikely that you withheld taxes, although you may have for either of the following 2 reasons:

The contractor did not return a Form W-9 or provide an accurate Social Security number or another identifying number in the W-9. In this case, the IRS expects you to withhold 28% of their salary.

The entrepreneur is a foreign national. The IRS expects you to withhold approximately 30% of non-US citizen compensation unless that contractor’s home country is exempt due to a tax treaty with the United States.

Fill in the fields with your business and contractor contact information. A phone number is only required for your business, not for the contractor. Indicate the name and full address of the contractor.

Mail or deliver 1099 to your contract worker by January 31. You will need to get the form to your contractor no later than January 31 following the tax year. If you don’t mail our mail or give your contractors 1099 by this date, you could face a penalty from the IRS.

Send “Copy B” of Form 1099 to your contractor.

Send copy A of 1099 to the IRS by February 28. Copy A is the red copy of Form 1099. If you are filing your returns electronically, the filing deadline is March 31. The 1099 filing process is separate from filing your business tax return, which may or may not need to be done electronically.

If applicable, send copy 1 of 1099 to your contractor’s state tax department. You do not have to do this if income tax is not deducted from the worker’s wages in the state in which he resides.

Keep copy C of 1099 for your records. It is recommended that you keep copies of all your tax documents for at least 4 years.