As part of your year-end planning process — well it should actually be an on-going process, but more on that later – reviewing who you’ve paid in 2019 and will you issue them a 1099 in January is critical to do now. Best practices say every vendor you pay for services you should receive a W-9 from them the first time you pay them. But let’s be real…we’re all busy and that likely didn’t happen. If it did, stop reading and move to another year end planning tip.
What’s a 1099?
Because many individual contractors don’t always keep accurate books and records and report all their income, the IRS relies on the 1099 information form to let them know how much has been paid to those providing services who are not companies. They then add up all the 1099s they receive and match this to what individuals or companies report. If there is more 1099 income reported to the IRS than on a return, a matching notice is sent. As you can imagine, not a good notice to receive…basically the IRS thinks they were shorted.
Why the exclusion for those who are companies? No real guidance on this, but likely as they think “companies” somehow are more likely to report all their income accurately, but like many things with the IRS…a bit of a dated view.
The 1099 is issued in January to any vendor or contractor you have paid more than $600 for services during the following year that is not a company. There are a few more categories of vendors who receive 1099s – landlords, lawyers – but check back later in the year for a blog about how to easily issue 1099s and who needs them.
How to get ready for 1099s
You can’t always tell from a company name whether or not they are a company, so don’t try and guess. When you decide to pay a vendor – say for some freelance marketing help – after you sign a contract with them ask them for a W-9. A W-9 will provide you everything you need to issue them a 1099 – name, EIN/SSN, entity type and address. If you want to use one of the cloud tools to issue, get a personal email address so you can email the 1099.
Because this is confidential info, you should provide a way for a vendor to upload this to a secure site and/or have them send the W-9 password protected. Some vendors are not secure with their W-9 info. All you can do is create the opportunity for them to be secure, if they don’t use it, that’s their concern. Be sure to provide clear instructions on how to provide it securely. Also, set expectations that a vendor won’t be paid until the W-9 is received. Once they have their check, it’s very hard to chase them for the W-9.
Once you have received the W-9, you should store this in a secure environment. Be sure it is legible and signed. It will be what you rely on if the IRS questions why you issued a W-9 with certain information if it does not match the IRS’s database.
- During November, review all the vendors you have paid more than $600 for services.
- Review the list and see which names you have already received a W-9.
- For those you don’t have a W-9 for, email or call them and provide instructions on how to securely supply the W-9.
- Follow-up on those you do not receive a W-9 within 5 days.
- Check back in December for next steps in preparing for 1099s.
Any questions, reach out to Cloud Tax Matters for help.