WHAT YOU SHOULD UNDERSTAND BEFORE TAKING ACTION
Although it is required by law that ALL independent contractors and business owners who pay a business $600 or more should provide the business with a 1099-NEC (formally 1099-MISC prior to 2020), it is well known that most beauty industry professionals do not abide by this law. So before you claim that you’ve never heard of this requirement, therefore, it must not be true, let me say that not having heard of it doesn’t mean it isn’t a legal requirement; it is, and if the IRS ever catches up with you, you will be severely fined.
Even if the salon owner where you rent a booth, or a suite refuses to provide you with their Tax ID number, you are still obligated by law to submit a 1099 showing how much in booth rent or salon suite rent you paid. Keep in mind that if you go through the process of submitting a 1099 on behalf of a salon owner that refuses to provide you with their Tax ID number, your relationship with the salon owner may be adversely affected, and you may be asked to leave. So make sure you understand the consequences of your actions even though you are required by law to do what’s right.
WHAT IS A W9?
A W-9 is the tax form that a payor (booth or salon suite renter) gives to the payee (salon owner) to complete if the payor intends to pay the payee $600 or more during the year. The W9 informs the IRS that the person receiving the money is not subject to income tax withholding, and is, therefore, responsible for paying his or her own taxes.
Although you are not required to provide a corporation with a 1099, it is still advisable to give the salon owner a W9 to fill out even if the salon is a corporation. This way, the booth renter has a record on file showing that the salon owner checked the “corporation” box, and therefore, the renter is not required to provide the salon owner with a 1099. This business practice is advisable in case there is an issue or a discrepancy in the future.
HOW TO AVOID THE PROBLEM OF NOT RECEIVING A COMPLETED W9 FROM THE SALON OWNER
As a booth renter or salon suite owner, the best way to prevent the problem of a salon owner refusing to fill out a W9 is to use a proactive approach. For example, as part of your initial interview with the salon owner, make sure you discuss your intentions of having them fill out a W9. Also, make the filling out of the W9 part of the lease signing process. So as you read and then sign your lease, the salon owner should simultaneously fill out the W9 form. People have less of a problem filling out a W9 before they receive any money from you versus after the fact.
WHAT TO DO IF THE SALON OWNER REFUSES TO FILL OUT A W9 AFTER YOU HAVE PAID RENT FOR THE ENTIRE YEAR
If the salon owner fails to provide you with the required W9 information needed, you MUST still submit the required 1099 form to the IRS. Complete all the sections you know the answers to but leave the TIN/SSN field blank or write “Refused to Provide.” Once the IRS receives the 1099, they will send you a notice (CP-2100 or CP2100A Letter) that will require you to start withholding a certain percentage of your rent. Before sending the IRS a 1099 for a business that refuses to fill out a W9, you are required by the IRS to make at least three attempts to obtain the information from the salon owner. Make sure you document each attempt for your records to avoid penalties from the IRS if you should ever get audited.
Backup withholding is the percentage of withholding the IRS requires you to hold back when a business refuses to provide you with a completed W9. As of the date, I am writing this post, the percentage you are required to withhold is 24%. So for example, if your weekly rent is $200, you are required to withhold $48 from each payment, which means you pay the salon $152 per week, and the IRS gets the balance of $48. Withholding on your payments to the salon should be reported on IRS Form 945: Annual Return of Withheld Federal Income Tax. Once the salon owner fills out the W9, you can stop the backup withholding.
PENALTIES FOR NOT FILING A 1099 WITH THE IRS
The assumption with some business owners, independent contractors, booth renters, etc. is that if the IRS hasn’t contacted them, they can’t possibly be doing anything wrong. That is not necessarily the case. The IRS has limited resources and, therefore, they are not able to pursue everyone that is not complying with the law. As a matter of fact, the percentage of taxpayers that ever get audited is very, very, very low. As such, people can get away with unlawful practices for their entire lives.
The question is, are you willing to play IRS Russian roulette in the hopes that you never get audited?
PENALTIES AND FINES AMOUNTS
If you happen to be one of the unfortunate few that get found out by the IRS, here are the penalties for not filing a timely1099:
- If you file late, but within 30 days of the original deadline, you are subject to a $50 per form late filing fee. Although you filed late, the maximum amount of late fees you will be required to pay is $547,000 regardless of how many late forms were filed. To meet the max of $547,000 would mean you filed 10,940 late forms.
- If you file more than 30 days, but by no later than August 1st of the original deadline, you are subject to a $100 per form late filing fee. Although you filed late, the maximum amount of late fees you will be required to pay is $1,641,000 regardless of how many late forms were filed. So if you were required to file 5 1099’s by the deadline of January 31st and you filed all five between February 1st and August 2nd, you will be fined $500 for filing more than 30 days after the deadline, but no later than August 1st.
- If you file after August 1st of the original deadline, you are subject to a $270 per form late filing fee. Although you filed late, the maximum amount of late fees you will be required to pay is $3,282,500 regardless of how many late forms were filed. So if you were required to file 5 1099’s and you filed all five after August 1st, you will be fined $1,350 for filing after August 1st.
As you can see, the penalties and fines can add up pretty quickly if you do not abide by the rules.
If you are comfortable side-stepping the IRS 1099 filing requirement laws and not filing a 1099 even though you are required to, at least you now know the law. It’s always best to know the laws before you break them; that way, if you are ever unfortunate enough to get in trouble with the IRS, it won’t come as a huge surprise because you were aware of what you were supposed to do but decided not to do it. You’ll just be mad that you were found out.
By Desarie Anderson, CPA to Beauty Professionals