1099s

• A 1099-MISC, Miscellaneous Income, is the form used to report income you pay to people you hire on a contract-only basis. The 1099-MISC form contains information about the individual or company whose services you used. You include all compensation you give to the individual and give this information to the individual. A copy is sent to the IRS.
  
  You may have to issue other, less common, 1099 forms. This really depends on what your business relationship is with the other person or company. Anyone you pay dividends to from your corporation, for example, needs a 1099-DIV. If you sell real estate, you must fill out a 1099-S for any real estate transaction you are engaged in. A 1099-INT is used for any interest income you pay to an individual or corporation. A 1099-R is used if you pay pension income to employees, although this may be handled by a third party pension administrator if you are having another financial institution manage the retirement funds. If someone defaults on a debt they owe to you, you may issue a 1099-C, for cancelled debt. This reports the bad debt as income to the borrower and lets you write this off as bad debt.
  
  

Benefit

• You get a tax deduction for all compensation you pay out and most money you report on a 1099 form. Many times, the money reported on a 1099 form is money you've paid to another person in some form. This money may be a business expense and is eligible for the deduction that businesses normally receive for claiming business expenses. Interest or dividend income is also deductible as is reporting bad debts which were never repaid to you.
  
  When filing a 1099-MISC or any other investment income or compensation-based 1099, and correctly reporting compensation you paid out during the year, you increase the business's adjusted gross income downward. This, in turn, increases the amount of money the business has to spend on growing the business.
  
  

Warning

• If you fail to file a 1099 for all compensation you pay out, you may face an IRS audit. You must report all income you pay out to contract workers. If the contractor files his tax return, then the IRS will know you did not file paperwork on your end. Any audit conducted will likely reveal that you improperly reported your income. While you may technically owe less income tax due to not taking a deduction for the reported amount, the IRS may penalize you for failing to file a correct tax return.
  
  

Consideration

• You should review all the business's expenses and make sure that you file all required tax forms. Not reporting income you pay to contract employees not only increases the risk of an audit, but you pay more in taxes than you need to if you don't take the deduction for that expense. Consider hiring a payroll company if you cannot manage the 1099 forms yourself, or you want to make sure that this is done correctly each year.