Filing 1099s is a necessary evil that comes with the territory of running a business. While most people think of 1099s as something to deal with at year-end, you can drastically simplify your year-end process by improving your processes now so that, when the time comes to file your 1099s, you’ll have all of the information that you need right at your fingertips.
Before we move on, let’s clarify a few points:
What is a 1099?
A 1099 is a form that is filed with the IRS and delivered to someone that you paid (i.e. a vendor), which lets both the IRS and the vendor know how much you paid them during the year (the IRS uses this info the help ensure that the vendor is reporting their income correctly)
What type of payments are 1099s issued for?
1099s are issued for several types of payments, but the most common for small businesses are for payments made for:
- Providing services such as legal/accounting services, web development, repairs/maintenance, etc.
- Interest (paid on a loan or note)
Who needs to be issued a 1099?
1099s are issued to any non-corporate vendors that you pay more than $600 during the year for one of the reasons mentioned above. Non-corporate entities include:
- Note – There is an exception to this rule that states that attorneys should be issued a 1099 even if they are a corporation
- Another note – If you are paying a corporation by check, make sure to include the word “Corp” or “Inc” on the payee line on the check. Technically, if you don’t, you have to issue them a 1099 (If you’re curious, the reason for this is that if you include “Corp” or “Inc” on the check, the check can only be deposited into the company’s bank account and the IRS then assumes that it will be correctly reported on the corporation’s books)
What can I do today to make my 1099 reporting run more smoothly?
- Maintain your books and records in real time throughout the year
- When you start working with a new vendor, the first thing you should do is request that they provide you with a Form W-9. A W-9 basically says “please tell me your company’s name, entity type, address and tax ID”, all of which is information you will need to issue a 1099 at year-end. Your company policy should be that no payment will be issued until the vendor has sent you a completed W-9
- Enter the W-9 info into your bookkeeping software as it comes in. Most bookkeeping software includes a 1099 report that will consolidate all of the relevant info so that it’s ready to use at year-end, but that only works if you keep the system up-to-date
- Make sure to use the “Payee” field in your bookkeeping software. This is how the software will know who you paid so that it can aggregate the payments at year-end for the 1099 report
A few other common questions:
Which box on the 1099-Misc do I use to report payments that I made for services?
Box 7 – Nonemployee compensation
Do I need to issue a 1099 to a vendor if:
- I pay them by credit card? No, the credit card company will handle this
- I pay them via PayPal? No, PayPal will handle this
- I pay them via Upwork, Fiverr, or through another platform? You should consult with the particular platform’s terms, but they usually handle this for you
- I pay them less than $600 during the year? No
Are there different types of 1099s?
Yes – you will mostly be issuing 1099-Misc’s, but if you pay interest or dividends, you would file a 1099-Int or 1099-Div to report these payments.
I work with contractors, and I have heard that I can pay them as employees (and report the payments on a W-2) or as a contractor (and report the payments on a 1099), is this true?
While it’s true that both are possible ways to pay someone that does work for you, it is not really up to you which you use. The IRS has strict criteria that must be followed to determine whether you report payments as payroll (on a W-2) or as contractor payments (on a 1099). This is a much bigger topic, so keep your eyes open for another article discussing just this.
Not sure about something you read? Have an unusual situation you want to discuss? Let us know, we can help!