Year-End Accounting: Preparing 1099s

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.

Gathering W9s

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.

Prepping 1099s

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!

Bookkeeping vs. accounting

What exactly are you looking for when you decide you need help with your numbers?

There is going to be a day in your small business life where you decide you need accounting help. It could be right at the start of your company, to help set up things correctly, or it could be a couple of years in when you are too busy to do everything. Do you need a bookkeeper or an accountant? Here’s some guidance.

Bookkeeper

A bookkeeper is the person who will keep you organized on a monthly basis. You have invoices to send out, bills to pay, receipts sitting around, payroll and bank accounts, and you’re not quite sure how to book any of it. This person will help you with all of that.

Usually a bookkeeper comes in when you have a computerized system already set up. They can pick up where you left off, even if you left off months ago. They are task masters, similar to having a house cleaner come in to clean once or twice a month. Think transactional.

You can find bookkeepers that specialize in a specific industry, or are experienced in the accounting software you use, though general, all-around bookkeepers are pretty good at all of it. Bookkeepers are not required to have special education in accounting.

Accountant

An accountant is someone who analyzes your company’s activity as a whole and provides insights on your company’s financial health. They work with you on a monthly, quarterly, or annual basis.

Now, an accountant can do your bookkeeping for you, and also provide the higher-level analysis on a regular basis. Your accountant may or may not be a CPA, and having a CPA is important mainly if you are a publicly-traded company (can complete an audit of your books) or want this person to sign off on your taxes (can represent you before the IRS). An accountant is not necessarily a tax preparer, but may be. So choosing an accountant requires a bit more thought on what you actually want this person to do for you.

Like bookkeepers, you can find accountants that specialize in a specific industry, but a general small-business accountant is a good pick. Accountants are required to have a Bachelor’s degree in accounting, and a CPA must have that plus have passed the CPA exam.

How do you choose?

It boils down to what you really need right now and your preferred way of working.

Needs: at some point in your business growth, you’ll probably need all the people. You will not want to be doing your own taxes when you have employees and assets and such, and at some point, you will just get too busy to do everything. It’s very common to have a team of finance people, but if that sounds overwhelming at this moment, go with the one that is the most immediate need. If you need tax help, find a good tax accountant. If you want help with some weekly accounting tasks, get a bookkeeper. If you need help creating an accounting system or get financial statements ready, get an accountant. If you’re thinking, why can’t I get one that does it all?, that’s a great point and that is very rare. You can hire an accounting firm, and they will have a team of professionals that cover all these for you at the appropriate time of year (example: you’ll probably only talk to your tax accountant in January-March).

Work style: Know thyself. If you’d like to have up-to-date books at any given moment for reference, it won’t do you any good to hire an accountant you talk to once a year. This is an array or choices out there to fit your schedule and how you like to work. This also includes if you prefer to chat with this person, or only email, or want to work side-by-side.

I’d be remiss if I didn’t mention cost. You may want to hire that firm, or that dynamic accountant, but it may be beyond your price range right now. That is AOK and it’s smart to save some money. If you really want a monthly bookkeeper but financially can only swing that quarterly, go with it. It’s the best solution at this moment. Also consider not hiring the cheapest option out there – you usually get what you pay for in this arena.

I wrote a separate post on how to choose an accountant, and that offers questions to ask yourself to narrow down what you’re searching for in the financial world. I think you’ll enjoy it – check it out here.

As a business owner, you’re most likely hiring a lot of different contractors to help with all aspects of your business. It’s not easy. I do hope this helped encourage you to think about your accounting needs and get a better understanding of who you may want to invite onto your team. Go you!

Q&A: When should I hire an accountant?

Q: When do you suggest I hire an accountant to help with my small business? I feel like it’s smart to have one from the start but will I just be paying for something I don’t really need?

A: This is a very common question. Accounting is one of the first things people want to offload since they do not like doing it and/or feel they need guidance in how to do it. Here are my thoughts on the subject.

Best times to call in an accountant:

:: At the very start of your business
Once you kind of have things set up and you’re about to get clients, or just got your first one, that’s a great time to call an accountant. I think it’s smart to bring this person in for a consultation/short-term project, to help you set up your accounting system. An accountant can help you pick a software if needed, and after learning about your business, can set up the perfect chart of accounts* specific to you. A great accountant will also teach you some simple tips so you can accurately and efficiently take care of your own books for the rest of the year, and can help point out accounting-type things, like remember to pay your quarterly taxes! Remember to charge sales tax! Remember that your dog is not considered your employee!

:: When you are a couple of years in and are ready to level up
Many small business owners handle their own accounting for the first year or two, when things are a bit slower and quite manageable. Once they are in a groove and business is picking up, it’s either a matter of getting busy (and the books getting a bit behind) or things are getting more complicated (and the books are getting chaotic). It’s a great time to get professional help. You could call in an accountant a couple of times a year to help clean up the last six months or so. Or consider bringing an accountant on as a regular contractor. You will not be getting less busy, so the idea of having someone to upkeep your books on at least a monthly basis may be quite attractive.** The right accountant will not only help with your monthly bookkeeping but also help you plan for the long term.**

:: When you are desperate
It happens. Maybe you suddenly get attention from a celebrity and your business grows 348% in two weeks. Maybe you decide to pursue outside funding and need help getting your financial info in tip-top shape. Or maybe you just do not understand accounting but do know it is important for your business. All valid reasons. Get the help you need. Accountants (I believe) are here to be of service to you. We want to help you in a subject matter that is not a natural knowledge we are born with. Let us help you. Do not struggle alone. We do not judge you in any way. Come with the craziest, messiest books (or no books at all) and you probably, actually, will make our day!

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Relax – you got this…

BONUS: When NOT to get an accountant —> when you want to ignore your finances
I get it – you don’t want to worry about your books, you want to spend your time in your zone of genius. That’s great. But know the difference between wanting to delegate your accounting to someone else to save time, and wanting to ignore your accounting all together. Be as stubborn as you want, but as a small business owner it is IMPERATIVE you understand your numbers, if only on the high level. You need to know where you spend your money, how your income is looking, what your financial responsibilities are, in order to grow your business. Heck, at least sustain your business. As the leader of your company, even if you are the only employee, you cannot afford to be ignorant as to the financial side of your business. Period.

I hope this has given you some ideas on when to call in an accountant. Of course you can hire someone from Day 1 and have them work with you daily. But know there are many different options so keep looking around for the right accountant who will work on a schedule that feels comfortable for you and your needs. They are out there!

Footnotes

* Chart of Accounts – the list of accounts that you use in your accounting program and show up on your financial statements. Examples: Income, Office Expenses, Accounts Payable. Some accounts are common across the board for all businesses, some of specific to a certain industry (restaurant vs. business coach) or type of business (service vs. product). A program like Quickbooks gives you a basic set of accounts at the very start but it’s smart to tailor them to your business, for purposes of you tracking your own financial activity, for accurate tax reporting, and for adherence to accounting standards.

** Upcoming articles from me. Just thought of them right now as I was writing this. One is: How to choose the right accountant for you and the other is: What is the difference between bookkeeping and accounting. Coming soon!

I stand with Black Lives Matter

I was Zooming with an old friend and fellow entrepreneur yesterday, and he mentioned he called his four biggest clients and spoke to the CEOs about taking a stand on Black Lives Matter, as they had not said a peep. I had not said anything, either. I am a very small business, with me as the only employee, and a handful of clients. I’m not particularly well known in the community yet and am pretty sure no one is really noticing my activity. And it’s this kind of mindset that has allowed institutional and systemic racism to fester in our society.

As a white person, I have had the privilege to turn away from racism. We seem to believe that racism is a thing that happens to a specific group of people and it doesn’t concern us. This is dangerous thinking, that an injustice has to affect us directly before we stand up to it. This is what the system wants us to believe. But if we took one uncomfortable moment to look deeper: this is a human thing. Fellow humans are being oppressed for no reason. This is an issue for every one of us. You may have seen this quote recently: “If you are neutral in situations of injustice, you have chosen the side of the oppressor.” ~ Desmond Tutu, South African cleric and activist

I have been learning that the systems that keep racism alive work so well in part because they reward white people for their compliance. Rewards in terms of opportunities and access. And if you step out of line, i.e., speak up about the problems you see, those rewards can easily be taken away from you. Who would choose to give up such great benefits for folks they don’t even know?

These systems run deep. They have been established over many, many years. So it’s not going to be dismantled this week. Black people have been working to dismantle it since the beginning, and it is not their problem to work on. We all live in this society, so it is for all of us to work on. It’s not just for people with the most resources – money, influence – it is for each individual to stand up for what is right and demand change, of themselves and of the institutions that uphold the injustice.

So my platform is not big, and I don’t have millions to donate, but there are things I have been doing:

  • attend talks and discussions on race, led by black leaders
  • listen to new (to me) black voices on their experiences and observations
  • donate to the Equal Justice Initiative and The Parris Foundation
  • petition my local government to defund the police (and we did!)
  • read books on anti-racism – first by Milagros Phillips, next by Ibram X. Kendi
  • plan to speak up in November so we remember to vote and to vote for anti-racism
  • vow to continue my listening and learning forever
  • build a business that welcomes all people

I have taken so many things for granted – my education, my living spaces throughout my life, my general feeling of safety, heck, my accounting major and my career today – and I am disgusted that I am only now understanding how our racist systems helped me get these things. I will do better. As one of the protestor’s signs read, “I’m sorry I’m late – I had a lot to learn.” And I still have a lot more to learn.

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Gorgeous artwork “Prevail” by Mister Michelle, or Michelle Robinson

Welcome to the blog

If you had told me last year that I would blog about accounting, I would have told you in colorful language that you were crazy. And here we are.

By its very nature, accounting is boring. I have read other blogs and financial articles and even as someone with an interest in the topic, I think most are hard to get through. I do not consider myself a boring person so that’s one reason why I do want to write about accounting – to make it more digestible.

I believe strongly in education, especially in helping number-averse business owners understand what they are looking at on a financial statement. I want entrepreneurs to grow and thrive and knowing their numbers will help them do that. But its a long road when the terminology is confusing and the concepts start from the middle. I use human language and think I have a knack for explaining stuff in a logical way.

I also really love writing. I wanted to be an English major in college. (long awkward pause…)

The other reason why I decided to blog is that I also enjoy chatting about all kinds of business topics related to entrepreneurship. Those will be included, as well as human topics like who you are and why you are in business and how we can all work together. Take “business as usual” out of your vocabulary and stomp on it. Big NOPE. We are first and foremost people and that should be reflected in our business offerings and practices. We will chat more about it.

In conclusion, let me say, Welcome. And thank you for joining me. This is as much a curiosity for me as it is for you, and I appreciate your willingness to be here.

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