What happens to 1099 under $600?

[catspit]

Hello all, seems like a great board you have here.

Our web design / development company has just become an LLC for protection and we're getting our feet wet with some of the more basic accounting matters. At the moment we're trying to set up a couple of our external designers as official contractors. From what I understand, we have them file informational W4's with us and then in turn issue them (and the IRS) a 1099-MISC in Jan for any work over $600. These amounts get taken off our business income such that we do not pay Tax on them.

All well and fine (please also correct me if I'm way off). My question is what happens to contract work under $600? Do we still send out a 1099 to the IRS? If we don't need to do that, how do we subtract that money from the business income on the schedule K? Is it safer just to issue a 1099 for all contractors regardless of cost so there's no 'dodgy maths' on the sched K?

Sorry if this question is rather basic but I've been doing quite a bit of searching around and can't seem to find the answer. The whole sched K thing is new to us and while we have a CPA, I'd rather also know what is going on before I get charged for his advice!

Cheers,
/Andy

[Evan]

Any money that you pay to a contractor can be deducted, even if it's under $600.00 per contractor. This assumes that your contractors are sole-proprietors or partnerships. If it is a corporation, you don't need to.

To collect their SSN or EIN, have them fill out W-9 (not W-4 -- which is for employees). This is a legal request for the information, so they are required to fill this out. I'd suggest having them do this BEFORE you start making payments. Nothing is worse than tracking this down at the end of the year.

If it is under $600.00, you do not have to issue a 1099-MISC. This doesn't mean you can't issue them if it is under $600.00 -- but it's not necessary. It could be entirely possible for you to accumulate $10,000 in contractor payments (for example) and not issue a 1099-MISC. This is, of course, assuming that you don't pay over $600.00 to each of them.

As for Schedule K, it isn't too difficult. I assume you're being taxed as a partnership (and not corporation -- though the answer is similar). Your contractor payments are Line 20 "Other Deductions" (from page one), and list it as "Contracted Labor". Line 22 from page 1 becomes line 1 of Schedule K -- this is your net income. From there, you just make all of the adjustments that aren't listed above. There are quite a few of them. Lines 1-13 are most common. Lines 15-17 aren't very common at all. Lines 18, 19, and 20 may apply.

Schedule K-1 just divides this out to each partner based on your respective portion of income.

Good luck.

[catspit]

Thanks for your prompt response! I did indeed mean form W9.

After checking out forms 1065 and schedule K everything you mentioned makes sense. When it asks for 'attached statement' is there anything particularly official they are looking for or just some form of accounting of contractor payments mate (i.e. will an excel sheet do or is there a specific form for this as well?).

[Evan]

By attaching a statement, they're just looking for an attached list detailing those expenses.

Your best putting your company name and EIN on the top Then separate expenses that it doesn't provide you that you inccured.

CONTRACTED LABOR...............$3,000
PRINTING EXPENSE.................$ 520
TOTAL $3,520 <-- make sure this is the number you write on that line.

[raystewart]

Penalties associated with 1099's:

$50 for each TIN name mismatch (get your W-9)
$50/1099 form if you have over 250 forms and you file on paper
Late filing penalties
Penalties for not withholding 28% when you do not have a TIN