A top priority for your Payroll and A/P teams at the start of 2023 will be processing 1099 forms and getting them into the hands of vendors by the January 31 deadline (the deadline’s Feb. 15, 2023 for Form 1099-MISCs that have data in boxes 8 or 10).
As you know, not sending your 1099 reports out on time has costly consequences, with penalties ranging from $50 to $290 per form. If the IRS thinks you intentionally disregarded reporting, the minimum penalty is $580 per form. IRS also charges interest on penalties.
To keep your organization’s 1099 form reporting accurate and on time, here are some best practices to pass along to your Finance team.
1099 form to-do list
As part of your day-to-day vendor management:
- When onboarding all vendors and contractors, require them to submit either a Form W-9 or Form W-8 (request for tax filing information for foreign individuals or entities that don’t have U.S. citizenship or residency, but have worked in the U.S. or earned income in the U.S.). Even if your total payments to them for the year don’t meet the $600 threshold that triggers 1099 form reporting, you’ll be prepared. If for some reason a W-9 or W-8 isn’t completed during onboarding, ask for these forms before issuing any payment.
- Using the info from Forms W-8 or W-9, complete all relevant fields in your accounting software when setting up a new vendor profile. This includes their legal business name, entity type and taxpayer identification number (TIN). This may enable your accounting software to generate 1099 information automatically at year-end. Also, complete vendor records ensure that Finance will be ready for any external audits.
- Take care of vendor housekeeping issues right away. If you receive an IRS B Notice letter that notifies you that there are matching errors on the name or TIN on the 1099 forms submitted, ask the vendor for an updated W-9 or W-8.
And when tax time starts getting closer:
- Make sure all hires are classified either as employees that get Form W-2 or independent contractors that get either Form 1099-NEC or MISC. Refer to the IRS guidelines that focus on three categories to determine if a worker is an independent contractor or an employee: behavioral (Does the company control, or have the right to control, what the worker does and how the worker does their job?), financial (Are the business aspects of the worker’s job controlled by the payer?) and type of relationship (Are there written contracts or benefits and is the work performed a key aspect of the business?).
- Check that records are accurate. In addition to maintaining detailed records of all payments made to contractors and vendors, it’s a good idea to double-check that their mailing addresses are up-to-date before sending 1099 forms. You don’t want to miss a deadline because of an out-of-date address on file.
- Review any vendor payments that you made through credit cards or other third-party processors. Payment processors like Paypal or Venmo and credit card companies issue Form 1099-K for payments received. These transactions must be excluded from your 1099 reports to avoid double reporting.
- Don’t forget about state tax reporting requirements. Although the IRS shares 1099 data with 30 states via the Combined Federal/State Filing program and FIRE electronic filing system, some states don’t participate in the program. If you’re in Iowa, Illinois, Kentucky, New York, Oregon, Pennsylvania, Rhode Island, Utah, Virginia, West Virginia, Vermont or Washington D.C., you need to check with the department of revenue to see when 1099 filing is required.