Service providers such as advertising agencies are typically independent contractors who work with numerous businesses. Even though you don't pay payroll taxes on these contractors, they still have to pay taxes on their income, and the IRS needs accurate information about the nature and amount of that income. When you pay an advertising agency to provide services for you, however, you must report that income to the IRS on a Form 1099.

1099 Purpose

Employees who are paid with regular paychecks receive regular statements of their earnings and the amount deducted for the IRS. But independent contractors receive no such record. This can make it difficult for them to accurately report their income. It also makes it challenging for the IRS to track their income. The 1099 form, however, provides an easy mechanism by which the IRS receives records of the payments to independent contractors, and contractors are able to accurately report their earnings.

Reporting Requirements

You are required to file a 1099 if your payments to an advertising agency are more than $600 for the tax year. You report the money you pay for the agency's services – such as creating an ad, deciding where to run it and contracting for that broadcast time or newspaper space. You don't have to report the money for the advertising itself, since that is considered merchandise rather than a service. If your ad agency is a corporation, you do not need to file a 1099. You are required to provide 1099s for advertising services only to individuals, sole proprietorships, partnerships and limited liability companies.

How to Report

You need to have your advertising agency's taxpayer identification number to complete a 1099, so contact the agency as soon as you've exceeded $600 in payments to get this information. Fill out payments and put them in the appropriate category boxes. If you've reimbursed an ad agency for business expenses, you must also report these on the 1099. Then mail or electronically submit the 1099 to the IRS. If you file more than 250 1099s, you must submit them electronically. You must also send a copy to the advertising agency.

Consequences of Noncompliance

If you fail to report income you've paid to your advertising agency, you can be fined for each form you fail to file. Additionally, if you deduct expenses in excess of $600 for which you have not filed 1099s, you could be audited. You may also interfere with your advertising agency's ability to file taxes, which could harm your relationship and interfere with future business.