You can feel it in the air, can’t you? That small change as the year draws to a close. A tinge of excitement filled with lots of trepidation of the busyness to come.
I bet many of you think I am referring to the current Christmas season. No, I am referring to that other season that will soon be quickly upon us, 1099 reporting!
In just a few weeks (yes, I said weeks), these simple yet complicated reports will start to be compiled. Now is the time to make sure you know what vendors will need to be 1099’d and make sure you have a current W-9 on file.
BBK has already been making our lists and checking them twice, trying to find out what clients have been naughty or nice! The IRS is coming to town. Are you ready?
Joking aside, knowing what is and what is not 1099’d can be very confusing. Then comes the difficulty of making sure you have all the important information about that vendor on file. Here are some tips to make this upcoming season a success for your small business.
Collect W-9s for Each Contractor
Having a W-9 on file for each contractor is imperative. In practice, it seems to be rather hard to accomplish.
Establishing an accounting policy that no contractor will be paid without a W-9 on file will insure that your business will have the information you need. Even if that contractor moves and does not inform you, as long as you have a W-9 on file for them, that is all you need to prove to the IRS that you have done your due diligence in attempting to locate them.
Who should be considered a contractor? It is a good practice to have a W-9 on file for any individual not paid as an employee as well as any vendor you do business with.
Pay Close Attention to Entity Type
Once you have collected all of your W-9s, it is important that you review them and input the entity type into your accounting software. Setting up your software correctly can save you much unnecessary work come January.
S corps and any company ending in Inc. do not receive a 1099. The only exception to this rule is Law Firms. No matter the type of entity the law firm is, they must all receive a 1099. Knowing who does and doesn’t qualify to receive a 1099 can be very confusing, so please use us as a resource for any questions you have.
1099 mapping is available in your accounting software and allows you to review your 1099able accounts and vendors to see what information might be missing.
The IRS continues to add more and more to what is and what is not considered a 1099 service and vendor. Using accounting software will help you analyze what accounts need to be 1099’d.
Currently the IRS considers any combined services and goods totaling $600 or more to be 1099’d. This does not include goods alone, but goods accompanied by services as well. So, what does this look like.
For example, if you purchase $500 in plumbing products and $200 in plumbing consulting from XYZ Plumbing Supply, you would be required to send them a 1099. If you purchase $600 of plumbing products but no services from XYZ Plumbing Supply, then you would not need to 1099 them. Like so much with the IRS, clear as mud!
Let’s look at another example. Did you know that you should 1099 your landlord (if they are not an S corp or incorporated) for the rent you pay? That means that most small businesses will have at least one 1099. Now what if that “landlord” is you for your home business. You would then need to 1099 yourself.
Here is one final example. Did you know that if you pay a vendor (including the rent mentioned above), with a credit card, then you don’t send a 1099? The credit card company is responsible for sending the 1099 instead. However, if you pay that same vendor with check, then your business does have to be the one to 1099.
Thankfully, accounting software programs are coded for these rules and will generate an accurate 1099 report without you having to be well versed in these rules. The important thing is to make sure the software is setup properly.
PATH Act of 2015
The Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law last December and affects the filing deadline for W-2s and certain types of Form 1099. In the past, companies had two filing deadlines to keep in mind for W-2s. January 31st for providing the employees their copies and February 28th to file copies to the Social Security Administration.
Starting this year however, there will now be one deadline for both on January 31st. This new deadline also pertains to the 1099-Misc. that has an amount entered in Box 7 Nonemployee Compensation. If you don’t have any 1099s with Box 7 filled in, then you can keep the past filing dates of January 31st and February 28th. If you have both types of 1099s however you will only have the earlier filing date.
For more information on how the PATH Act may affect your business, please visit https://www.irs.gov/pub/irs-pdf/i1099gi.pdf.
This too shall pass!
With this accounting season quickly approaching on the heels of another busy, all be it, more enjoyable holiday season, know we are here to help.
Start getting organized now. Review account information to make sure you have complete information. Inventory your W-9 files to make sure you have one on file for all vendors. Pull reports to understand what services will need to be 1099’d.
Navigating the 1099 process can be difficult, especially while trying to meet year end goals. If our team can assist you in anyway, we would be happy to.