The 1099 time of the year is upon us. If you are looking for quick answers on what you should know about the 2023 1099 form process, check out our quick form 1099 overview chat which discusses:
- What is a form 1099, who needs it and why?
- Who is excluded from the requirements of receiving a 1099?
- What are some of the most common mistakes business owners make around 1099 forms?
- What is a 1099-misc and what is a 1099-nec?
- Experts advice for small business owners.
Read the quick chat transcript:
Tell me a little bit about 1099. What is it and who needs it and why?
A 1099 is a form that’s used to report compensation that is paid to eligible vendors or contractors who’ve done work for your company. Typically those are the types of 1099s that are issued by small business owners. So anyone that was paid $600 or more during the calendar year would receive this form 1099. It tells the government exactly how much they’ve earned and it provides the contractor or the vendor the form itself that they can use to record their income on theri taxes. In order to receive a 1099 a form that is requested by the person making the payments, is a W-9 form, which has the basic information of the name of the busines or the individual, the EIN number for the business of the social security number for an individual as well as their address and the type of entity that they are. And then that information is then used to report the the money paid throughout the calendar year.
So what most people don’t know is that there are two different types of forms now that report to the IRS. One is a 1099-misc which is the miscellaneous form, and the other is the 1099-nec which is the non employee compensation form. So on the 1099 miscellaneous, that was the form that was used prior to last year which reported all 1099 compensation. But last year they split it and now there’s this new form called the NEC.
So anyone who is a contractor, freelancer who’s providing your company services and you paid them more than $600 in the calendar year, they will be reported on form 1099-nec. On the miscellaneous form, that’s where in box one you’ll report any rents that were paid to your landlord. Most people don’t know that you actually do have to report rent paid on a 1099, so you’ll need a W-9 form from your landlord as well.
Those are typically the two that are most common in terms of needing to file. And then the last thing that I’ll say is that on the 1099-nec form you also are required to report 100% of any earnings, any payments that are made to lawyers, regardless of the threshold. Anytime you’ve made a payment to your attorney, you’re going to want to go ahead and make sure that you issue a form there.
Deadline to issue 1099 forms to eligible vendors or the individual is January 31st. Once you made that deadline, the next deadline is to remitt those electronically to the IRS, which will come at the end of February 2023.
Are there inudstries or business that do not need a 1099 form?
Even if someone is providing you services and it’s an eligible type of services, for example a marketing contractor or a an accounting firm, if they’re entity type that they disclose on their W-9 form is a corporation, they do not need to receive the 1099. However, if you issue one, it’s not going to hurt anything. I think a lot of people get scared that if they issue a 1099 to someone who is not eligible for one or isn’t required, that something bad is going to happen. Nothing bad is going to happen.
Additionally, if you’re paying a service to issue your 1099s (paying per form issued), then you don’t want to issue to any entities that you really don’t need them. Save a little bit of money
What are some of the most common mistakes that you've seen being done around 1099 for small businesses?
Well, I think it all goes back to where it begins. And the biggest mistake that I see being made is not collecting the information that you’re going to need in order to issue these forms upfront.
You lose your leverage when you’ve already paid these vendors in order to be able to obtain a W-9 form. So it’s just good practice that if the type of vendor that you’re going to pay is in a category that typically would receive a 1099 for those types of services to request a W-9 before you pay them any money, even if you’re going to pay them less than $600 at that one particular time because you never know if at one point throughout the year they’re going to exceed that threshold.
So you’ll want to collect those W-9 upfront. It’ll save you a lot of headaches at the end of the year because you know that you’ve already done the work in order to collect. Once they’ve been paid and if you’re not still in business with them or doing business with them or connected with them in any way It is very difficult to get them to provide you the information that you need in order to issue those.
And there are penalty fees associated with not filing 1099 for eligible vendors, it can be up to $300 per form. So in the event that you’re ever audited and you didn’t issue that 1099, it could be anywhere from 50 to $300 per form. So the penalties can be, you know, quite costly. They add up really quickly. And so it’s just best practice to make sure that you have done the work and make sure that you’re not going to get penalized later just in case.
That makes absolute sense. And great advice. Okay. From the members that we have interacted with so far over the years, what are the most important questions that usually arise when they ask, How do I set up a 1099? What do I do to create a ten? 1099 Yes. So it goes back to your the accounting system that you’re using for our members.
How do you set up / create a form 1099?
We use QuickBooks Online for everyone, but we don’t use QuickBooks Online to actually issue the 1099s. So we do enter all of the customer info or the vendor information into QuickBooks Online, and there’s a checkbox in the vendor information screen indicating that they need to be tracked for 1099 payments at the end of the year. QuickBooks will integrate with the system that we do use for issuing 1099 and we pull all that information out.
So it’s important to know where are you storing this information? There are a variety of different softwares that you can use in order to actually issue the forms. Some people still even file on paper. I don’t recommend that. But there are different nuances associated with different types of softwares that you need to know about. You need to make sure that you don’t just trust the accounting software to pull through all of the payments for that vendor that should be 1099. You need to actually do a thorough review of what’s included in the totals to make sure that the payments that are there are legitimately needing to be reported on a 1099.
One of the biggest mistakes that I see people make is that they’ll include reimbursed expenses on a 1099, which is not correct. You should only be 1099ing those vendors for the actual services themselves, because the reimbursements that that you’re giving them, depending on how that transaction flowed, you might be ending up double reporting something or reporting something incorrectly. So just be mindful of that. You got to make sure that that gets adjusted.
And the other thing that I’ve noticed too, is that sometimes if you’re making a pre-payment for an eligible type of service, 1099 are cash basis. So those prepayment accounts need to be included. So for example, if you prepaid your rent and let’s say you made a payment for your rent on December 28 for January, so you book it in your accounting system to the prepaid account when you go to pull the 1099 balances, it’s not going to pull through on to the report, but it needs to because the vendor was actually paid in last year and it’s cash basis. So you have to make sure that that prepayment is included in the total that’s reported.
So little things like that. There’s all kinds of things that you need to pay attention to.
What can be done if a mistake on a 1099 is made or deadline is not met?
So there’s no such thing as an extension. And the hard deadline for issuing your 1099 is definitely the date that you would remit to the IRS.
But 1099s don’t work like other tax form filings. If you’re late, it’s not going to generate a penalty or interest, because you submitted a 1099 a few weeks late. That’s not the way that it works. The problem becomes when you actually get audited or something gets questions, the risk of that is that you’re going to have any issue is pretty low.
However, most of your 1099 eligible vendors and contractors that actually want to receive it are going to be pretty on top of you and asking for when they’re going to receive it. If they don’t get you the information on time and then they need it in order to file their taxes, they’re going to come looking for you and they’re going to give you what you need in order to issue them the form.
And if you use a system like we do that allows for you to submit and remit at any time or you need to issue a correction, any time you issue a correction, it will automatically transmit to the IRS. So it’s completely seamless and it makes it a lot easier. You want to look for softwares that have that capability.
QuickBooks Online, unfortunately, does not make it very easy to issue corrections to 1099. So that’s one of the reasons why we don’t use it to issue, because we have corrections come through all the time and, you know, small changes and issues that need to be addressed. So we needed a system that makes that very easy.
What is your advice to small business owners about the 1099 form process, filling, correcting etc.?
One of the things that I always advise our members tis to constantly reach out, just after the first of the year to theri contractors/vendors. Because that’s when their contractors are already asking where their 1099 is, and the answer is always the same.
The deadline is January 31st. It might be issued before that, but they can’t expect it from us prior to that date. And that’s usually our stock response. And that should be your response to any of your eligible vendors or contractors as well as that. January 31st is the deadline. That’s when you can expect it.
And the other thing that I did want to bring up that just kind of popped into my head is to also just make sure that if you have a payroll software that issues 1099s on your behalf to independent contractors, if you’ve made any payments to those independent contractors, that should be included on that 1099, outside of the payroll system, you actually have to adjust the balances in the payroll system.
Otherwise they’re going to receive a 1099 that’s excluding some of those earnings. And that’s a really big mistake that I’ve been seeing lately, is that people forget – oh, I paid this person through, you know, one of these payment apps or I gave them a check that one time and it’s not recorded in that balance on the payroll system.
So you either have to issue them a second 1099 for the e earnings that were paid outside of the payroll system, which is not desirable to give someone two 1099 for the same business, or you need to adjust the balance that you keep them in the payroll system so that it includes everything. And most payroll systems allow for you to make those adjustments.
And most payroll systems, because of the nature of the way payroll runs, they issue 1099 really quickly. So probably most of the 1099s that needed to be issued for anyone that was paid on a payroll system like us, like paychecks like ADP have probably already gone out.
So if they went out and the amount reported on it was incorrect, simply contact your contractor and let them know that the balance is not reflecting the full amount that was paid to them. And that you’re working with the payroll company to get it corrected and then reach out to your individual payroll provider and ask them to make the adjustment and reissue the form.