Somewhere along the year, you most likely paid a contractor for a service provided to your business. Could have been a graphic designer for your logo, a business coach, an accountant or lawyer, or a part-time admin assistant. These are people/companies who should receive a 1099 from you.
What is a 1099?
A 1099 is a tax form that reports money paid to third parties. In recent years, it was a 1099-MISC that you used, and it included lots of other boxes you could most likely ignore (royalties, rents, farming). This year (2020), the IRS went back to a different form it used ages ago: a 1099-NEC. So for all of us who pay money to independent contractors, we now use a 1099-NEC.
Here’s an illustrated example from the IRS:
Who receives a 1099?
The IRS provides some broad guidelines to help with this. The main ones are:
- this person is not an employee of yours
- you paid this person/company $600 or more within the tax year
- you paid this person/company for services, not products
- this person/company is not set up as a corporation
The first two are the most straightforward – this person is not on your payroll, and your records for the year will show you what you paid this person over the last 12 months. The third point, you probably remember what you paid that vendor for. But how do you know what this person is set up as in the tax world? That’s where a W9 comes in.
If you are a service provider in your business, you most likely have fielded a request for your W9. It’s a pretty simple form – it has your name, address, your company name, your entity type, and your tax ID number. It’s a thing so people paying you can pay the correct person, and the IRS will get record of it.
Best place to start is in the vendor section of your accounting system. (If you don’t use an official accounting program, you can scan through your bank activity for the year). There’s usually a report you can run that shows the amount you paid during the year to each vendor. In Quickbooks, it’s called “Expenses by Vendor Summary.” Right away, you can eliminate the vendors to which you paid under $600 over the year. For the ones that remain, you can then eliminate any you paid for products/tangible items (like office supplies, raw materials, books, software). You’re now left with vendors to which you paid $600 or more for services.
If a vendor matches those two criteria and is a corporation, you do not have to send them a 1099. The one exception to this rule is law firms – even if they are incorporated, you must send them a 1099. If you are not sure if your vendor is a corporation or not, it’s best to request a W9 anyways, and that will tell you what you need to know. Yes, it’s an extra step, but if you already have their email and a contact person, better safe than sorry. (there are penalties! More on that below…)
Easiest way is to create a form email and BCC all the vendors you’d like a W9 from. Short and sweet: “We’re closing out 2020 and are beginning the 1099 process. Please provide us with your company W9. Thank you!” Period, done.
This process seems painful because you waited the entire year to do this for all your vendors. That is not a judgement, because I am where you are (and seriously, I know better!) I’m mentioning it to encourage you to request a W9 each time you start work with a new vendor. Just hired someone to pretty up your website? Ask for a W9 along with the contract. Entering new ones into your system once a month is a heck of a lot easier than doing all this at year end (when, frankly, you have more important things to do, like close the past year and plan for the new year). It’s a game changer!
Specifically, you do not have to send a 1099 to a designated C Corp or an S Corp. Nor do you send one to an LLC that is taxed as a C Corp or an S Corp. You do have to send a 1099 to a sole proprietor, a partnership, a single-member LLC, and an LLC taxed as a partnership.
Once you received back all your W9s, you enter the information into your system. You really only need to enter the tax ID number for vendors to which you really are going to send a 1099. If you received 1099s from corporations, you are more than welcome to add their info into your system, but there really is no point. I suggest keeping a folder, in your email or cloud server, of all the W9s you received, so you never have to wonder if you already requested one and what entity they are, etc.
Somewhere in the vendor information, there is a box that asks if it needs to be tracked for 1099 purposes. Make sure you check it!
An example of a vendor in Quickbooks:
Because the important step is, you will tell your system to run the 1099s for you, and the system needs to know which ones they are.
Alternatively, you can send out 1099s on your own. You will need to get printable 1099s from an office supply store or order them from the IRS. You also need a 1096, too – it’s a summary sheet of the 1099s you are sending.
New in 2020: you will be sending form 1099-NEC. Previous years, it has been 1099-MISC, but that has been changed. Take heed!
I have sent out 1099s manually, and I have sent them out via my accounting system. Yes, there is a fee for the system to do it for you, but it is so worth, in my opinion.
But I don’t wanna…
I know. The process is tedious. But the IRS wants to keep everyone honest about their income. So they implemented penalties if you do not file your 1099s.
The due date to send out 1099s is January 31, 2021. If you do not send them out, you may be fined $30-$100 per form not filed, depending on how late after January 31 you filed it. If the IRS believes you intentionally did not file them, or intentionally reported incorrect info, you can be fine up to $250 per form. (Not surprisingly, there are also penalties if you receive a 1099 for services you provided to someone, and you decide not to report that income on your taxes).
I am not a tax accountant and I’m certainly not a fan of fees and paying money in general, but at the end of the day, I really believe it’s best to be honest and upfront when it comes to taxes. You may want the short-term gain, but it’s going to bite you in the long-term. That’s my two cents – you are an adult and can do what you want.
I’m happy to be here with you and pass along the knowledge I have to empower you as a business owner. Wishing you a successful and fulfilling 2021!