Year-end is huge for tax accountants because of the payroll and contract labor filings the IRS requires businesses to do.
It’s important to know what documents you need to have in order, as well as how to compile the information and the due dates for submitting them. An accountant can guide you in this, but here are some tips to keep in mind when it comes to year-end considerations for payroll and 1099s.
Holiday Bonuses
One mistake often made is in regard to holiday bonus payments. There is nothing wrong with giving a holiday or year-end bonus. In fact, it’s a good thing that many employees look forward to! However, the IRS frowns if the bonuses are given in cash. Bonuses must be run through payroll and the proper payroll taxes should be remitted.
W-2s
When you create your W-2s, ensure you include the appropriate annotations for car allowances, health insurance, retirement benefits, etc.
You need to give W-2s to your employees by January 31st, however, the forms are not due to the IRS until February 28th. This allows time to make any corrections that are necessary after the employees have a chance to review them. While corrections can be made after they are sent to the IRS, they are inordinately more difficult, so it's important to make sure that the information is correct before submitting it to the IRS.
1099 and W-9 Forms
1099 forms are also due to contractors by January 31st and due to the IRS by February 28th. The 1099 form is the IRS form for miscellaneous income.
Anyone who does contract work for you should provide a W-9 form when the contract is agreed upon. The W-9 is the official IRS form that basically tells a business owner hiring contractors the legal name and tax ID number for the contractor.
When to Issue a 1099
It can be confusing and hard to know when to issue a 1099. For example, it may be difficult to know if the invoice you received was for the purchase of office equipment or for the installation of the equipment. There are legal differences and the costs must be separated. If you’re unsure, be sure to ask for clarification from the contractor that submitted the invoice to you.
Some other questions that need to be answered before issuing a 1099 are if the total amount paid to the contractor throughout the year was less than $600 and if the person you paid was an individual or a corporation.
Withhold Payments Until You Receive a W-9
It’s a good idea to withhold payments to contract workers until they have provided a W-9. It is the responsibility of the contractor to provide the proper information on the W-9 to you. Since they fill out the form, it transfers responsibility regarding the accuracy of the information from you to them, so it's important that they, rather than you, fill out the information.
E-Verify
Having said that, as a small business owner you can use the federal E-Verify system to validate information provided to you by prospective employees and contractors. Most states can also validate taxpayer ID numbers provided on the W-9 by contractors.
The Bottom Line
Laws differ between the federal level and various state-level agencies. If you feel confused about the minutia of the US Tax Code, you are not alone. Consult your accountant if you have questions about the E-Verify system.
Additionally, a good accountant will know the right questions to ask to help you stay legal and legitimate when issuing W-2s and 1099s at the end of the year. Having a professional on your side will benefit you greatly and give you peace of mind.
