With so many numbered tax forms in the mix, it can be hard to keep track of which number applies to what. One that is often underutilized, but very important for a small business, is the 1099. This tax form applies to services paid that equate to $600 or more a year. This encompasses not just contracted employees, but also more mundane items, like rental payments or interest payments. Let us help demystify the complex 1099 for you–who and what it applies to, how to best manage yours, and ways you can automate it.
The W-9 is the basis of 1099 distribution. This document should be sent to service providers you or your business uses so that you’ve got your tax ducks in a row to begin with. This will document transactions between you and the service provider. Fair warning: some service providers can have an icky view of this document. W-9’s (and the eventual 1099 they receive) can give the lesser-educated taxpayer the impression they will owe more on taxes by filling one of these out. In tax reality, this just means you and your service provider are doing things properly. It is NOT a “guaranteed pay more tax” ticket. Smart business-goers should enter into proper business relationships to ensure they are playing a fair (and legal) game. If you are doing things properly, you have a good idea of what tax deductions you will have to potentially offset that income. It shouldn’t be looked at as a guessing game of how many deductions are needed to cancel out that 1099. If that is the case, a serious look at your business is in order. We have some tips on taking that hard look here.
In short, anyone who pays $600 or more a year for services that are not an employee will receive a 1099, but there still seem to be gray areas surrounding who gets one, why, and how. As a business owner, you are paying for multiple services. Start with the obvious ones: contracted employees. If you pay an employee who is not an “official” employee, they need a 1099. Just like your vendors; upon hiring them, they should fill out a W-9 so that all of the info will be ready.
Pro tip: make sure you obtain their W-9 before paying them.
The less obvious 1099 recipients are in rents, services (including parts and materials), prizes and awards, or other income payments. To clean up any of these gray areas, your best bet is to work with someone who knows the complicated 1099 process. We can help with that.
One of the reasons January of every year is so busy for us accountants is because of the 1099 filing deadline. 1099s are due by January 31st of each year. Since the majority of our clients who outsource their accounting are on the smaller side, they rely on quite a few contractors to support their business on projects throughout the year. Planning for 1099s should not be a one-month-a-year duty, however.
If you get thrown by the ending letters on the typical 1099, we have your quick explanation here:
The 1099-MISC is for things like rent and other payments over $600.
The 1099-NEC is purely for paying independent contractors.
The 1099-INT is for interest payments.
As is the common theme in most of your general business running, having up-to-date books is your friend. In some cases, you may not realize you have a few easy 1099 pickin’s. By keeping accurate records, and properly accounting for all payments, you can see who or what is in the magic $600 and more range. As tax filing nears, you will want to be able to have enough time to catch any vendors that have met that amount and distribute their 1099.
The quicker things are reconciled, the quicker you will catch any missed opportunities.
If you are using an online bookkeeping program like QuickBooks, and/or a payroll program there are 1099 automation opportunities that should be utilized. There is also a program called “Track 1099” that specializes in the 1099 process. This emails, files, and amends 1099’s for you. Payroll systems like Gusto and Just Works will also handle 1099 management for you, if you pay your contractors through them. Depending on your business size and its needs, any or all of these systems can help ease your 1099 filing burden.
If you’re thinking the 1099 process is pretty complicated, that’s OK. It can be. Start by focusing on getting your vendors and contracted employees set up with the proper documentation, i.e. a W-9, and ensuring your books are up to date and accurate. These will help you to have a solid start on your 1099’s. If this seems like to massive of an undertaking, Accountfully is here to help. We provide the all-important up-to-date financials and help implement (and manage) the cloud-based systems your business can leverage to automate these time-consuming tasks. Talk to us about your business and we’d be happy to see how we can help you before tax time catches you off guard.
Depending on how complex your business is, this process of gathering the correct info and distributing 1099s can be overwhelming and very time consuming. We have a team here that can help you manage the process, so you can focus on other beginning of the year tasks. If you would prefer to leave this process up to the pros, let's start by learning more about your business.
.png)