Rhonda Abrams The Passionate Entrepreneur

January 31 is the deadline for businesses to send out "1099s," the familiar name for Internal Revenue Form 1099-MISC. Companies must send 1099s to every independent contractor they've paid more than $600 in the preceding year.

January 31 is also when self-employed people should start contacting any company they worked for that hasn't sent them a 1099 for 2005.

Filing your 1099s is a very serious matter to the IRS. Here's why: If you're a regular employee of a company, the IRS has a pretty good way of making sure you pay your taxes -- your employer withholds taxes from your paycheck. But if you work independently, the companies that pay you typically don't withhold taxes.

So how does the government make sure you pay taxes on the money you've earned? They require companies to let them know they've paid you -- via the 1099. And the IRS financially penalizes any company that fails to share that information.

Another incentive for companies to file 1099s -- as if IRS penalties aren't enough -- is to make sure they can take their full tax deductions on expenditures. If a company wants to deduct payments to independent contractors, they've got to file 1099s.

The same is true for rent. If your landlord isn't a corporation or a real estate agent, you've got to send them a 1099 in order to deduct rent payments.

Remember, the government considers someone an independent contractor even if they only do one job (for more than $600 a year) for one company. So, if your sister-in-law is a computer whiz and you pay her $900 to set up a network for your business, you have to file a 1099 in order to deduct that expense. And she'll have to report that income on her taxes.

Check with your tax preparer to make certain how the rules relating to 1099s apply to you. But, generally, you must file a 1099 for:

• Any independent contractor who's worked for your business and you've paid $600 or more during 2005. Note: This amount includes payment for parts and materials.

• Any partnership you've paid more than $600 for work done for your business in 2005.

• Any corporation you've paid $600 or more for legal or medical services.

• Anyone you've paid more than $600 in rent -- whether for space or equipment -- unless they're a corporation or real estate agent.

• Anyone you've paid more than $10 in royalties.

Generally, you don't file a 1099 for:

• Employees. Instead, you file a W-2 for them.

• Corporations that have done work for you. (Except for legal or medical services -- or for fish purchases! How does the IRS comes up with this stuff?)

• Independent contractors you've paid less than a total of $600 during 2005.

• Work done for you personally rather than for a business.

• Payments made to tax-exempt organizations. Although non-profit organizations must file 1099s, your for-profit company doesn't have to file payments made to charitable organizations or government entities.

January 31 is just around the corner. File those 1099s now and stay out of trouble with the IRS later.