1099 Rules for Business Owners
Over the past few years there have been a number of changes and updates regarding the reporting rules for the illusive 1099-Forms. Many business owners simply guess as to what the rules are and oftentimes get exasperated and just give up choosing to file nothing at all. This can be a dangerous result as the penalties can add up quickly.
If you are not sure which forms you many or may not need to send, be sure to get help from a bookkeeper or tax pro. That is your best bet for getting this right. Feel like you can handle it one your own? Read more to find out what you need to know.
First, you have to determine WHICH 1099 form to send out; and, my oh my, there are a number to choose from including:
1099-A, Acquisition or Abandonment of Secured Property
1099-B, Proceeds From Broker and Barter Exchange Transactions
1099-C, Cancellation of Debt
1099-CAP, Changes in Corporate Control and Capital Structure
1099-DIV, Dividends and Distributions
1099-G, Certain Government Payments
1099-H, Health Coverage Tax Credit (HCTC) Advance Payments
1099-INT, Interest Income
1099-K, Merchant Card and Third Party Network Payments
1099-LTC, Long-Term Care and Accelerated Death Benefits
1099-MISC, Miscellaneous Income
1099-NEC, Nonemployee Compensation (this is an old form that was previously discontinued in 1982 but recently made a comeback in the year 2020)
1099-OID, Original Issue Discount
1099-PATR, Taxable Distributions Received From Cooperatives
1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530)
1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
Second, the general rule is that business owners must issue one of the above 1099 forms to each person to whom they have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099's for payments made for personal purposes. You are required to issue 1099 reports only for payments you made in the course of your trade or business.
The penalties for not doing so can vary from $30 to $100 per form ($1.5 million for the year), depending on how long past the deadline the company issues the form. If a business intentionally disregards the requirement to send a 1099, it is subject to a minimum penalty of $250 per statement, with no maximum. Bottom line, the penalties can add up!!
Here are the basics you should know.
Who are you required to send a Form 1099? You are required to send Form 1099 to vendors or sub-contractors during the normal course of business you paid more than $600, and that includes any lawyer, individual, partnership, Limited Liability Company (LLC), Limited Partnership (LP), or Estate. Check with your bookkeeper to find out if you should file a 1099-NEC or a 1099-MISC.
Who are considered Vendors or Sub-Contractors? Essentially, this is a person or company you have paid for services that isn’t your employee. Not sure if you should be classifying this person as a Vendor vs an Employee? use the QuickBooks Wizard tool to figure this out! You will likely send a 1099-NEC (Nonemployee Compensation) form to these individuals if they qualify.
What are the exceptions? The list is fairly lengthy, and it depends, but the most common is that you don’t need to send a 1099 to:
-SOME Vendors operating as S or C-Corporations (you’ll find their status out when you get a W-9…see below, though laws are changing rapidly on this as well).
-Sellers of merchandise, freight, storage or similar items (but get a W9 from them either way, because your tax expert might find a condition).
-Payments of rent to or through real estate agents (typically property managers). However, keep in mind you need to issue a 1099 to a landlord you are paying rent (who is not legally classified as a property manager), unless they meet another exception.
-Vendor payments of less than $600 in a calendar year
-Vendor Payments made with a credit card or business 3rd party merchant processor such as PayPal
Don’t worry about credit card payments and Business Paypal payments. The IRS allows taxpayers to exclude sending Form 1099 to any payments you made by credit card, or third-party merchant processing payment networks such as PayPal, Square, Stripe, Braintree, or Intuit. These payments are being reported by the card issuers and third-party payment networks on Form 1099-K. These companies will send out a 1099-K for you if eligible, by the end of January. HOWEVER, see bottom of this blog for Zelle, Venmo, and Personal Paypal...as these personal payment systems are NOT excluded and require a 1099 to be sent if the vendor qualifies to receive one.
Lawyers get the short end of the stick. Ironically, the government doesn’t trust that lawyers will report all of their income, so even if your lawyer is ‘incorporated’, you are still required to send them a Form 1099 if you paid them more than $600.
The W-9 is your “best friend”. Some of you may be frustrated that you don’t have the information you NEED to issue the 1099. One of the smartest procedures a business owner can implement is to request a W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor’s mailing information, Tax ID number, and also require them to indicate if they are a corporation or not. You can download a W-9 here.
Always ask for a W9 & Email before you pay a new Vendor their first bill payment. This way you and your Vendor know from the start that you’ll 1099 them for any qualifying payments, and it means that they will have motivation to give you this info as there 1st PAYMENT depends on it. Always get an email address from every Vendor you work with and make sure your bookkeeper has this (we suggest uploading these to your HubDoc account!). Then if you fail to request a W9, at least your bookkeeper can ask for one for you by emailing the request for a W9 to your Vendor. Then your bookkeeper can gather everything they need for you and handle the filing and everything for you. Just be sure to give them all your Vendor emails.
The 1099 filing procedure is done with SPECIAL forms & Submissions. Regrettably, you CANNOT simply go to www.irs.gov and download a bunch of 1099 Forms and send them out to your vendors before the deadline. The form is “pre-printed” in triplicate by the IRS. Thus, you have to order the Forms from the IRS, pick them up at an IRS service center, or hopefully grab them while supplies last from the post office or some other outlet. Best bet is to collect W9's and or emails all year from your Vendors, then send all this info to your bookkeeper through out the year and have them enter this info into an accounting software like QuickBooks. Then at year end, your bookkeeper can simply review which people to 1099 and have all the forms filed on your behalf ELECTRONICALLY, and mailed & emailed out to your Vendors. QuickBooks Online particularly has a 1099 Wizard that will remove any Vendors who don't qualify for a 1099. Which is great because maybe this year they do but next year they won't. Let your bookkeeper help you decide. Schedule a meeting to discuss this in November and again in early January so you are prepared.
EMAIL & MAIL your Vendor their 1099’s. Many times people move. So the address your Vendor may have given you on their original W9 might have changed by the time January rolls around. So do it both ways. Via POSTAL MAIL & via EMAIL. This will ensure that you remain in compliance with the law, and that your Vendor gets their 1099 from you ON TIME. This will also prevent them from bugging you for it in February if the paper version gets LOST in the MAIL or arrives LATE. If you process your 1099's through the QuickBooks Online 1099 system, then you can have QuickBooks both MAIL and EMAIL these out for you. But be sure to do this process WITH your bookkeeper at the same time. We don't recommend going it alone. Be sure your bookkeeper is there. QuickBooks Support is not designed to answer 1099 related questions that pertain to 'who' you should 1099 and 'how' much. These questions are better answered by your bookkeeper who knows you past years history and if anything needs adjusting before you file. They will also make sure you save a static form of all the 1099's for your records, and have them handy in PDF version in case any of your vendors bug you for a 1099 later. It's a lot easier to simply email them a PDF of their 1099 is their paper one gets lost in the mail, or the previous email you used was wrong.
Deadline to Payees. Taxpayers are required to issue and mail out all Form 1099's to vendors by January 31st. Wish you would have kept better records when paying folks last year right? Right! Be sure moving forward to ALWAYS ask your new vendors for a W9 and email BEFORE you pay them and start working together. This also ensures you are working with the right contractors who also want to play by the rules.
BE CAREFUL NOT TO WORK WITH VENDORS WHO WANT TO BE PAID “UNDER THE TABLE”. You will run into Vendors who want to be paid “under the table”. These Vendors will not want to give you a W9 because they don’t want to be 1099’d at year end and have to report any income.
Do yourself a favor, and just don’t work with these types of vendors.
Paying Vendors with Cash. You can't have your cake & eat it too. Let's just say you ignore my advise about working with contractors who want to be paid under the table. Maybe it's because they are giving you 'such a great deal', such as cheaper prices, ect. Or, they convince you that they just "can't afford to pay the taxes". Even if they give you a GREAT DEAL for the service, the problem is, YOU CAN'T WRITE OFF ANY OF THOSE COSTS AS BUSINESS EXPENSES. Why? Because, you're trying to hide that they ever happened, right? To save your buddy from having to pay income tax? Problem is, you can't "hide" bank withdrawals of cash. So, anytime you withdrawal cash from your business and give it to someone to help you, and you don't request invoices and send a 1099 at year end to that vendor for those cash payments (when they go over $600 in a year), those cash bank withdrawals turn into OWNER DRAWS. Yup. So guess who ends up having to PAY TAX on these cash withdrawals from your business bank account? YOU, the BUSINESS OWNER. If you try to convince your bookkeeper to write off those charges to that person, because you supply them with receipts and invoices backing up the payments for the work they did, that would be fine. BUT, if you then you turn around and never 1099 that person (cause we're keeping it under the table, wink wink) watch out. If you are ever audited you'll end up LOOSING the write off of those vendor expenses and paying big fines. You can't have it both ways. So either the VENDOR gets 1099'd and pays the income tax, or YOU pay the income tax by calling those payments to the vendor"personal owner draws". Maybe it's worth paying them cash? I'm not sure why, but if it is that important than just pay them from your PERSONAL bank account, and consider everything you pay that person a personal cost and don't try to get a business write off for these costs. You must pick one or the other, you can't have them both. Money you pay Vendors "under the table" will give you either:
1) ZERO write off for that charge, and cost you personally
2) Will create issues for you later if you are audited and never sent a 1099 for these Vendor costs that you also tried to write off as business expenses.
This is business after all. You’re not running a charity. If you do pay people with cash through the business, send them a 1099 at year end and make sure they give you receipts/invoices so you can prove what the cash payments were for. Always 1099 your vendors when you pay them over $600 with cash, keep good records, collect receipts, and get those write offs for your business!
Deadline to IRS. Next, don’t forget you have to compile all of your 1099s and submit them to the IRS with a 1096 by January 31st as well (NOT the end of February- the old rule). Also, depending on state law, you may also have to file the 1099-MISC with the state. Sounds like fun…right? (This is where delegating the task to your accountant may come in helpful).
What about foreign workers? If you hire a non-U.S. citizen who performs any work inside the United States, you would need to file the 1099. It is your responsibility to verify that the worker (1) is indeed a non-U.S. citizen, and (2) performed all work inside or outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return to you Form W-8BEN. Ask your tax pro about this before proceeding.
Procedures for this year. Moving forward this year, make sure to get an Email & a Form W-9 from all your vendors before they can get paid. This will save you a lot of headaches next January so you don’t have to track down their emails, mailing addresses, EINs, and their business structures.
Don’t ignore the 1099 or the process and get with your Bookkeeper & CPA to make sure to finish up the process before the end of January. This could save you major penalties. Don’t get caught not filing the Forms on time.
REGARDING VENMO, ZELLE, & PERSONAL PAYPAL PAYMENTS READ UPDATES BELOW.
Venmo & Zelle payments are PERSONAL payment transferring companies, so these are like doing an ACH transfer to someone. So these payments are like simply handing someone cash.
These systems were set up to be for personal use, so the 1099 is required for all payments over $600 in a calendar year if the Vendor has a qualifying W9 (Sole P, or Partnership, ect).
PayPal accounts that ARE set up for business are 3rd party MERCHANT PROCESSORS, but if you are using a PERSONAL PayPal account to send money to contractors, then you may still need to send those contractors a 1099 for anything over $600 in a calendar year, if they have a qualifying W9 and are not a Corporation.
The key phase here is MERCHANT PROCESSOR. Merchant processors were set up to handle business to business transactions and as such THEY MAKE YOU ENTER YOUR BUSINESS INFO. So that's why they can send the 1099K form for you - because they already have all the business owners business tax info (SSN number of Business Tax ID number, they ask for this when you set up your account to pay people).
Click the link below to a great article on this to educate yourself.
Always be sure to Read the tax laws to fully understand and consult with your CPA. Everyone's situation is different and things do DEPEND on the situation.
QuickBooks Professional Trusted Advisor
A Bigger Bottom Line, LLC.