Understanding Information Returns: A Guide for Small Business Owners
Introduction
As a small business owner, filing taxes can be a daunting task. Amidst the paperwork, one of the essential forms that owners must file is the information return. An information return is a document that reports certain types of payments made to each individual, such as independent contractors, employees, and freelancers. It is essential to understand this form to avoid any penalties.
This article will provide small business owners with a comprehensive guide to understanding information returns. We will provide you with essential insights into what information returns are, types of information returns, and how they work. So, let’s dive in!
The Basics: What Are Information Returns?
Information returns are forms that report specific types of payments made to each individual during the tax year. Essentially, it’s a record of everyone to whom you have paid money for services. They help the Internal Revenue Service (IRS) to match up information between what you have reported on your employee’s W-2s and the annual tax returns of the individuals who received payments from your business.
The Types of Information Returns
There are several types of information returns, including:
Form 1099-MISC
Form 1099-MISC is required for any contractor not on payroll and paid over $600 within a tax year. This form is crucial because, if the payment goes unreported by the individual, the IRS could come after the business. It also reports other miscellaneous payments such as rent, prizes, and awards.
Form 1099-MISC for Rent
If you own a rental property, you will have to file a 1099-MISC for rent paid over $600 in a tax year.
Form 1099-NEC
Starting from 2020, Form 1099-NEC will be used for reporting non-employee compensation, such as payments to freelancers, independent contractors, and consultants.
How Do Information Returns Work?
When filling out your information returns, you will need to provide the name, address, and tax identification number for every person or entity that has received payments exceeding specific amounts. Your business will also need to send copies of the information return to these individuals by January 31st.
If you fail to submit these forms or send them out by their respective deadlines, your business could face penalties.
Conclusion
Information returns might appear to be complex, but they are critical for small businesses. By understanding what they are and how they work, you can avoid late fees and penalties by ensuring compliance with the IRS regulations. As you prepare for tax season, consult with your tax advisor, and ensure that your information returns are in order.
