As a business owner, you can’t just skip payroll conversations, and that includes the year-end 1099s.
And if you’re dealing with contractors, landlords, and attorneys, they’re all part of your ecosystem and your team so you need a process for those people. You need to take it a few steps further than just making the deal on paying them and doing the work.
What is a 1099?
The 1099 is the nonemployee’s compensation equivalent of a W-2 for a payroll employee. This applies to almost every business dealing with service-based contractors, attorneys, and landlords. Note: This does not apply to your landlord for your home office deduction, but to rent paid for a business or commercial lease.
Other things to consider when filing 1099s:
- Amount: For the landlord, it's any amount of money you've paid in rent. For the non-employee compensation, this applies to anybody who has paid for a service more than $600 in a calendar year.
- Mode of payment: If you paid them by credit card or PayPal, the rule is you don't have a responsibility to issue a 1099. But if you pay by bank or cash, those should go on the 1099. Because if you're claiming it as a tax-deductible expense in the business credit and if you get audited, the IRS is going to want to know who you paid that cash to.
- Deadline: You need to send a 1099 by January 31 to the recipient that received the money. They also have to follow it on record with the IRS what they sent to the person.
HOW DO I PREP FOR THE YEAR-END 1099
1. Send it to their email and get it all done electronically.
Request those 1099s using this tool called Track1099 and use it to help populate your 1099s at the end of the year. You may also just ask them for the information, but having that form is best because there's clarity from the person on the information and to avoid any mismatch. There are also ways you can do this to make this a seamless process such as the Xero Accounting System.
2. Make it part of the onboarding or setup process.
If possible, it’s ideal to get this information before you pay them anything.
3. Make sure all information is correct.
If you don't get the information right, the IRS is going back and charging backup withholding on these people. And the documentation will save you every time with the IRS because the burden of proof is always on the taxpayer.
If you want to learn more about prepping for the 1099s, check out 037: Contractors and Prep for Year-End 1099s
