Have you hired an independent contractor, freelancer, consultant or a legal entity that you paid more than $600 in business-related expenses to this year? If you answered yes to that question, then you may be required to prepare and issue an IRS Form 1099-Misc to that vendor. This form will be used when they will file their income tax return. While this process may seem tedious and complex, it can be simplified using the correct tools and tips.
Let’s start with the fundamentals: what is a 1099? Essentially, a 1099 recaps all non-employee income. This form notifies the IRS how much you paid contractors throughout the entire year and what contractors should report on their tax return. The IRS uses this form to match vendor payments the issuing organization reports to the income the vendor reports on their tax return. The forms should be sent to all by January 31st and entities must submit appropriate copies of the 1099s and the entity’s 1096, which recaps the 1099s, to the IRS no later than the end of February if filing on paper or March 31st if filing electronically. To avoid penalty fees, the organization should file the 1099s before the deadline.
Are you wondering who should receive a 1099? The forms must be sent to any non-employee you’ve paid more than $600 or $10 or more of royalties to during the year. The list of non-employees who receive a 1099 is extensive. It includes payments to independent contractors, legal services (even if incorporated), payment for prizes and awards, small businesses, medical and health payments, any entity that is not an S or C corporation and partnerships or LLCs you have contracted. You will also likely need to file a 1099 for your rental and royalty payments. Any rent paid to a business must be included on a 1099. Like many rules, there are some exceptions to sending 1099s: you don’t have to send 1099s to most corporations and property management for rent payments. Moreover, employee business expense reimbursements should not be reported on 1099s.
At the beginning of October, start pulling a check register and go through the vendor list to rule out those who will not fit in the 1099 category using the guidelines mentioned above. For the vendors that will be issued a 1099, be sure to have a filled W-9 with their accurate name, address, Social Security number (SSN) or Employer Identification Number (EIN). The W-9 will also have their tax filing status listed so this should be used as a check to see if you need to issue a 1099 for that vendor. Send out a request to fill a blank W-9 for the vendors that are missing the necessary information needed. TIP: when you are adding a new vendor in your accounting system, it’s a good idea to send them a blank W-9 copy to be returned, which you can find on the IRS website.
It is January, almost time to file 1099s. Pull a check register for the last few months and make sure there are no additional vendors that will need a form. Once you have a final list of vendors that will be issued a 1099, fill out your forms and send them out by the deadlines above. It is vital that the contractors get these forms in time— they will need them to report their total income earned and calculate their final taxes owed for the year. You will also need to mail Form 1096 and Copy A of each 1099 Form to the IRS. 1099 Copy C should be kept for your own records.
Preparing and submitting 1099s can be complicated and dreadful but using the above processes and tips may save you time and hinder stress. If you have any questions or need help, please contact Vault Consulting, LLC for your accounts payable and accounting needs.