It’s was a dark and stormy night. The building stood there casting an eerie shadow. No sound could be heard and no light could be seen, save one. In what must have been the kitchen window, a lantern flickered and a slight taping sound could be heard.
Creeping slowly up to it so as not to disturb, I peeked in and what I saw still sends shivers up my spine.
There, hunched over the table, was a small business owner furiously trying to figure out his 1099 situation. What a nightmare!
(Scary Music Plays)
All kidding aside, we don’t want this to be you this January when 1099 season arrives. Now is the time to start collecting and reviewing your W-9s to make sure you are ready for January. We will be doing a 3-part blog series over the next few weeks to help you prepare.
Collect W-9s for Each Contractor
Let’s start at the beginning. 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, if 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.
Let’s look at an example of why this is so important. Say you hire contractor John Doe to complete $800 worth of work but do secure a W-9. The check you send is made payable to John Doe. Mr. Doe accepts payment not mentioning that the check should be made to John Doe’s Landscaping.
Fast forward to year end and your bookkeeper or CPA tells you that it appears John Doe will require a 1099 and you need to acquire a W-9. Mr. Doe sends in a W-9 made out with the landscaping company name. Oops, the check was issued to John Doe, John Doe accepted payment therefore the income is John Doe’s. This becomes a problem if the company is anything other than a sole proprietor. If the W-9 had been received before the check was cut, this could have been avoided.
We hope you have enjoyed our first installment of Nightmares on 1099 Street. Tune in next time, as we investigate entities and mapping.