Issuing 1099s: What You Need to Know

The Internal Revenue Service requires that Form 1099s are issued by January 31.  This means that you can’t wait until tax time to determine if you need to be issuing these important documents.

What Is a 1099?

A Form 1099 refers to one in a series of IRS tax forms used to document income other than those outlined by a Form W-2, which includes salaries, wages and tips.  The IRS requires a business to issue a Form 1099 when services are rendered for a cost of $600 or more annually.

So, what does this mean for you?  If you are a contractor, you may be familiar with a 1099 as the form your client issues as proof of the services you have provided.  What you may not have considered is when your business needs to be the one issuing the form(s).

How Do I Determine if I Need to Issue a 1099?

Form 1099(s) are generated by businesses.  If you earn a salary or hourly wages by working for a company that is not your own and are issued a W-2 at the end of each year to file your personal taxes, you don’t need to worry about filing a Form 1099. 

However, if you are self-employed, receive income directly from your clients or customers or file a separate business schedule with your taxes annually, you should determine if any of your expenses require you to issue a 1099.  Thus, if you are a hairstylist, provide childcare services, conduct in-home sales or do lawncare on the side – as just a few examples – keep reading.

Specifically, the IRS requires a Form 1099 be issued when the following four conditions are met:

  1. You made a payment to someone who is not your employee;
  2. You made a payment for services in the course of your trade or business;
  3. You made a payment to an individual, partnership, estate, or in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

If your business meets these four criteria, the next step is to determine if the payment was for a qualifying expense.

What Type of Expenses Qualify for 1099s?

Any time that you pay a non-employee for a service-related expense of $600 or more, you should issue a Form 1099.  Review your company’s records to see if you have paid any vendor more than $600 for any type of service or labor.  This does not apply to the purchase of goods, but rather, services such as:

  • Attorney Fees
  • Bookkeeping
  • Booth / Business Rental Space
  • Cleaning Services
  • Consultation Services
  • Graphic Design
  • Inspections
  • Lawncare
  • Maintenance / Repairs
  • Marketing Consultation
  • Professional Photography
  • Tax Advising and Tax Preparation Services

These are just some common examples of the types of services for which your business might use a separate, non-employee contractor.  For example, if you purchased a company vehicle for $20,000, you would not need to issue a 1099.  However, if you paid $20,000 in maintenance and repair for your fleet of company vehicles over the course of the year, you would want to issue a 1099 to your mechanic.

Rent is another type of expense that can require a 1099.  If you rent a specific space to conduct your trade – like a booth at a hair salon or an office in a multi-tenant building, you should include your landlord among your vendors needing a Form 1099.  Conversely, individuals working from a home office generally capture rent expenses elsewhere on their tax returns.

If you purchased a company vehicle for $20,000, you would not need to issue a 1099.  However, if you paid $20,000 in maintenance and repair for your fleet of company vehicles over the course of the year, you would want to issue a 1099 to your mechanic.

Does My Vendor Require a 1099?

Once you’ve determined what expenses may qualify for a Form 1099, you next need to assess what type of vendor or contractor you utilized.  If the individual or company providing your service is incorporated, you do not need to issue a Form 1099.  However, if your vendor is a sole proprietor, an LLC, LLP or PC, you’ll need to issue a 1099.

There are some exceptions to this rule, especially with attorneys.  When in doubt, contact your vendor directly to determine if you should issue a 1099. 

While you’re at it, be sure that you have the necessary information to issue the 1099, including the contractor’s legal name, what type of legal entity the vendor is and their Employee Identification Number (EIN) or Social Security Number.  The easiest way to collect this information, is to have your vendor complete a Form W-9.  Click here for a blank form that you can send. 

It is a best practice to collect this information when you issue the payment, so you may have already collected it.  However, it’s best to double check that none of their information has changed and always have a signed W9 on file.

How Did You Pay the Vendor?

The last step when determining whether to issue a Form 1099 is to establish exactly how much you paid and how you issued the payment.  If you provided payment through your bank account, such as with a check, debit card transaction or automatic payment, you will need to issue the 1099.  On the other hand, if you provided payment through a third-party service like PayPal, or with a credit card, the merchant is responsible for issuing a Form 1099K.

What Is the Benefit of Issuing a 1099?

The process of issuing Form 1099(s) can be complicated, especially if your company uses multiple contractors and vendors.  The IRS does require this documentation for services rendered in excess of $600, and your vendors will probably be depending on the information to file their own tax returns.  Thus, it’s important to take 1099s into consideration early in the year to ensure that you are issuing them in a timely manner. 

This can also help you avoid paying penalties to the IRS.  Specifically, if you do not issue a 1099 for the 2019 tax year by January 31, 2020, you will owe:

  • $50 per 1099 if filed not more than 30 days late
  • $110 per 1099 if filed 30+ days late but before August 1
  • $270 per 1099 if filed after August 1

Additionally, if you intentionally fail to file a 1099, then there are additional consequences.  Click here to see the full penalty schedule.

In many cases, it can be advantageous for you and your company to file Form 1099(s) as it provides documentation of expenses incurred in the course of your trade or business.  This frequently indicates a tax write-off, so it does work in your favor to take a good look at whether you should issue 1099s.

There are actually 10+ different types of Form 1099, so it is best to consult a tax professional when issuing these forms.  Contact us as soon as possible if you think that you need to issue 1099s for your small business.  We’re here to help make tax season as easy as possible for you.

Tax Benefits of Logging Mileage

Driving for work can be tedious, but you may come to appreciate your car time when tax season rolls around next year.

If you use your own vehicle travel from the office to a work site, from the office to a second place of business or drive for business-related errands, you can deduct your mileage.  With the start of the new year, it is important to keep careful track of the total miles you drive for business during a tax year – especially since the standard mileage allowance for business driving increased in 2022. 

There are two ways taxpayers can account for their mileage deductions:

  • Take the standard mileage deduction by maintaining a log of qualifying mileage driving.  For the 2022 tax year, the rate is 58.5 cents per mile for business use, up 2.5 cents from 2021.
  • You can also deduct actual vehicle expenses by retaining all receipts and other relevant documentation related to the cost of your business driving.

Either way, you will have to report the total miles the vehicle was driven during the tax year on a specific form, so take note of your odometer reading as early in the year as possible.

To take the standard deduction, keep a detailed log of miles driven.  Business vehicle write-offs can be a red flag for an audit, so be sure to record the odometer reading as well as the purpose of the trip, the starting location, ending location and date. 

If you choose to track actual expenses instead, keep copies of your receipts, including the date, amount and description of service.  You’ll need to organize these receipts into groups including gas, service, repairs, insurance and depreciation.

You can also claim the cost of parking and tolls, so keep those receipts as well.

Note that if you expensed your vehicle, you cannot also claim a mileage deduction.

Medical travel and military moves are also tax deductible – with a two-cent increase in 2022, up to 18 cents per mile.  Charitable driving is also tax deductible, at a fixed rate of 14 cents per mile.

2022 Tax Filing Season:  What You Need to Know

In an announcement sent January 10 by the Internal Revenue Service, the agency outlined a number of key points to help taxpayers know what to expect in advance of the April 18 tax deadline.  We’ve cut the jargon and distilled it down to make it easy for you:

  • The IRS will begin accepting and processing 2021 tax returns on Monday, January 24, 2022.
  • The filing to submit 2021 tax returns and payments or to file an extension is Monday, April 18, 2022 for most taxpayers, including those in Indiana and Illinois.  Those requesting an extension have until Monday, October 17 to file.

  • Due to COVID-era tax changes and broader pandemic challenges, the IRS is behind on processing 2020 returns.  Generally, you will not need to wait for your 2020 return to be fully processed before filing your 2021 documentation.

  • Because of this backlog, people are encouraged to use online resources before calling.

  • Additionally, to avoid delays in processing, you should avoid filing paper returns whenever possible.  The IRS anticipates most taxpayers will receive their refund within 21 days of when they file electronically if they choose direct deposit and there are no issues with their returns.

  • Watch for the mail for letters about advance Child Tax Credit payments and third Economic Impact (stimulus) payments. 

    • The IRS started sending Letter 6419, 2021 advance Child Tax Credit, in late December 2021 and continues to do so in January.  Please keep this letter and provide to MBJ Accounting with your 2021 tax documentation.  Eligible taxpayers who received advance Child Tax Credit payments should file a 2021 tax return to receive the second half of the credit.

    • The IRS will begin issuing Letter 6475, Your Third Economic Impact Payment, to individuals who received a third payment in 2021 in late January.  While most eligible people already received their stimulus payments, this letter will help you  determine if you are eligible to claim a missing payment.  Please keep this letter and provide to MBJ Accounting with your 2021 documentation.

Remember, in order to ensure a timely return, please submit your documentation electronically by Monday, March 14.  We are happy to make appointments to answer any questions you may have.

Is Your Retirement Account Helping Your Tax Return?

We all dream of retirement – especially on days when the alarm goes off too early. But could your retirement account be helping you with your tax return now? Things have changed since last year. Here are some things to consider before you file your 2021 tax return.

Check Your Tax Credit Qualification

Depending on your adjusted income, you may qualify for a tax credit for making certain contributions to your IRA or employer-sponsored retirement plan. Read more about the Saver Credit eligibility to see if you could take a credit of up to $1,000.

Avoid Paying an Early Withdrawal Penalty

If you withdraw from your retirement accounts before age 59 ½, you are subject to income taxes plus an additional 10 percent early withdrawal tax. However, due to the COVID-19 pandemic, in 2020 there were many exceptions that waived this fee. Most of them have been reduced at this point, but you can still avoid paying an early withdrawal penalty if you are using the funds for post-secondary education or as a first-time homebuyer. Click here to learn more about exceptions to tax on early distributions.

Rollover Your Retirement after a Job Change

If the post-pandemic economy has you changing jobs, avoid income tax by transferring your 401(k) directly to another 401(k) or IRA. Without a direct transfer, 20 percent of the amount withdrawn will be withheld for income taxes and you could also owe the early withdrawal penalty.

Don’t Forget about Required Minimum Distributions

If you are age 72, your retirement account may feature required minimum distributions. This is an increase from the previous 70 ½ age requirement. While this was waived in 2020 due to COVID, that is not the case for 2021. The penalty for missing a required minimum distribution is 50 percent of the amount that should have been withdrawn – in addition to the income tax due. Consider directing your required minimum distribution to the charity or church of your choice to avoid tax liability.

Dodge Double Distributions

Avoid increased income taxes by ensuring you do not take two distributions in one year. You are required to take your first minimum distribution by April 1 of the year after you turn 72 (or 70 ½ if you were born before July 1, 1949). Following this distribution, subsequent withdrawals must be taken by December 31 each year. This could mean that you end up with two distributions in the same tax year if you wait until the April deadline, which could bump you into a higher tax bracket.

Similarly, by taking smaller distributions before age 62 can help spread your tax bill over multiple years, rather than dramatically increasing your taxable income once you turn 72. This would all depend on your other income at those ages.

If you have questions regarding how your retirement account could be influencing your income taxes, don’t hesitate to contact MBJ Accounting about setting up an appointment.

Itemized Deductions vs. Standard Deduction: Which is Best for You?

If you’ve been used to tracking down every receipt for a donation to Goodwill to ensure you receive the maximum tax refund, the 2018 tax reform may have you questioning the best way to file your taxes. While your accountant will ultimately determine if you have enough deductions to be beneficial, educating yourself on the law will help you understand what documentation is worth the effort of obtaining when it’s time to file.

What Are the Benefits of Tax Deductions?

All citizens pay taxes according to the amount of money they earned in a given tax year.  The amount owed varies depending on the income bracket that your household falls under.  By documenting significant expenses – which has generally been done through itemized deductions in the past, you can show that you didn’t actually have access to as much money as you earned, because of your expenses.  This can lower your taxable income and thus the amount of taxes you are required to pay.

Recent tax reforms significantly shifted this process for individuals, dramatically changing the guidelines for tax deductions.

What is the Tax Cuts and Jobs Act of 2017?

The Tax Cuts and Jobs Act was passed into law at the end of 2017, amending the Internal Revenue Code of 1986.  This tax reform legislation impacts nearly all taxpayers.  Major components relating to itemized deductions of the new law include:

  • Reduced tax rates for both businesses and individuals
  • Increasing the standard deduction and family tax credits
  • Limiting state and local income tax (including property tax) deductions
  • Further limiting mortgage interest deductions

What Does this Mean for Me?

With this new legislation, the standard deduction increased for the 2018 Tax Year and then again with inflation for 2019.  The following threshold now applies as you prepare to file your taxes from last year:

  • $12,200 for individuals
  • $18,350 for heads of household
  • $24,400 for married couples filing jointly and surviving spouses

This means that every individual filing taxes and claiming themselves automatically receive $12,200 in deductions and refers to “taking the standard deduction.”  In this case, unless you have deductions above and beyond the $12,200 standard for an individual, it does not make sense for you to itemize your deductions.

Every individual filing taxes and claiming themselves automatically receive $12,200 in deductions and refers to “taking the standard deduction.”  In this case, unless you have deductions above and beyond the $12,200 standard for an individual, it does not make sense for you to itemize your deductions.

How Do I Know If My Deductions are above the Standard?

In most cases, the following elements are tax deductions that could be itemized.  You can see the full list on the IRS website here.

  • Mortgage interest
  • Medical expenses (more than 7.5 percent of your Adjusted Gross Income)
  • Excise tax with car registrations (in the state of Indiana)
  • State and local income taxes, including property taxes
  • Charitable contributions

That being said, if you have documentation of expenses in these areas that are above the standard deduction, an itemized filing may still make sense for you.

Medical Expenses
For example, almost everyone has some type of medical expense.  These costs can be part of the itemized deductions but must be over 7.5 percent of your total income to be beneficial from a tax perspective.  Thus, only major / catastrophic medical issues such as nursing home care or cancer treatment are typically worth itemizing.

State and Local Taxes
Another area that saw significant change is the deductions for state and local taxes, which also includes property tax.  There is now a $10,000 cap for all these areas, meaning that you’re only permitted to deduct $10,000 of state and local taxes – including real estate taxes – regardless of how much you paid.

While there is a cap for the amount of state and local taxes that you can deduct on your federal return, property taxes are an important component of filing your state tax return.  Thus, its important to share the amount of money you paid in property taxes for a given tax year – and the corresponding documentation – with your accountant.

Charitable Contributions
In the past you may have kept track of every dollar you put in the church offering plate or every time you supported a school fundraiser for tax purposes.  Now, unless your charitable contributions in conjunction with your other itemized deductions are above the standard deduction, it is no longer necessary to keep such meticulous records.  To compensate, some donors have moved to an “every other year” method, making larger, two-year donations so that they can qualify for the deduction the year of their gift and then take only the standard deduction the following year.

Remember that Itemized Deductions are Separate from Work-Related Deductions

These itemized expenses that have been discussed thus far are only one type of tax deduction.  If you have a small business, the expenses you incur in order to do your work are not included as part of this calculation.  These are tracked on a separate tax schedule, so you should be sure to continue to track business-related expenses.  The same may be said for education-related expenses, such as student loan interest, and investment-related deductions. 


The new standard deduction amount means that itemization no longer makes sense for most individuals.  So before you start digging through purses and pants pockets for receipts, do some quick math to determine if your expenses will be higher than the standard threshold. 

If itemization remains the best choice for you, make sure that you have all your documentation in order.  Refer to our handy checklist (insert link) for guidance.

Changes in deductions are just a few of the significant differences in the new tax law.  Contact us now for help navigating all components of the tax reform to ensure that you receive the maximum refund with the least headache.