Do Sole Proprietors Have to Issue 1099s?
The IRS requires small and large businesses to issue 1099s to report certain types of payments. The requirement applies to all businesses, including those run by sole proprietors and self-employed workers. The main consideration when determining whether you must issue a Form 1099 is the total amount your business paid and the legal structure of the business that received the payment.
Your business must file a Form 1099 with the IRS and to each unincorporated business or individual to whom you paid $600 or more during a given tax year. This includes rent payments and payment for services performed by individuals who are not employees. You must also report any prizes of a value above $600 your business awarded. If you make royalty payments with a value of $10 or more or if you sell $5,000 or more in goods to a person for resale anywhere that is not a permanent retail establishment, you must also issue a Form 1099.
Sole proprietors who have employees use Form W-2 to report wages, tips and other types of compensation, not a Form 1099. You must use Form 1099 to report payments made to unincorporated businesses and independent contractors who are not employees. One exception to this rule is payment for legal services. You must report all payments for legal services regardless of whether the provider of the services is a corporation, a partnership or any other type of legal structure.
There are certain business payments you do not need to report on a Form 1099, even though the items or services are taxable. Exempt items include payments for merchandise, freight, storage and telephone-related costs. Payments made to real estate agents are also exempt, although real estate agents need to report the rent payments they pass on to a property's owner.
The IRS imposes penalties on taxpayers who fail to provide complete and correct information on a Form 1099 by its due date. As of 2012, the due date is February 15. The penalties vary depending on the date you finally file a complete and correct form. If you file within 30 days of the due date, you have to pay $30 for each incorrect return. If you file more than 30 days late but before August 1, the amount jumps to $60 for each return. If you file the corrected form after August 1 or you do not file the form at all, you will need to pay $100 for each form.