In order to have an efficient and stress-free 1099 reporting process, it is critical to have the necessary information for reporting. Although there are various types of 1099s, this discussion will focus on the 1099-MISC, which is applicable to independent contractors and third-party service providers; however, the strategies for collecting the requisite data for reporting are the same for all types of 1099s.
The first step in reporting for 1099s is to determine for which vendors a 1099 must be issued. Form 1099-MISC is most commonly used for reporting payments to non-employee service providers. Before any payments are made, a determination of whether a payee is an employee or an independent contractor should be performed. Some questions to ask to aid in making this determination are related to control over an individual’s work being performed:
Although control is not the only criterion in the determination if three or more of these questions are answered “yes”, it is likely the third party is an independent contractor.
Once the determination is made regarding employee vs. non-employee status, a decision can be made about which of these service providers should receive a 1099-MISC. The following is a general list of those who would require 1099 for the calendar year aggregate payments in excess of $600:
Payments to a corporation or LLC being taxed as a corporation are exempt from the reporting requirements with the exception of those noted above, Also, payments for merchandise, telegrams, telephone or freight, payments to tax-exempt organizations and payments to real estate agents are not required to be reported on Form 1099-MISC. Expenses should be included in the following instances: expenses for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service or travel reimbursement for which the nonemployee did not account to the payer.
A Form W-9 should be obtained before paying any service provider during the course of the year who is not an employee. Unfortunately, however, many times these forms are not collected in advance. If the Form W-9 is collected during the year, the 1099 process at year-end is much more efficient and problem-free. A Form W-9, Request for Taxpayer Identification Number and Certification, is a one-page form the payee completes and provides to the company proving payment for services rendered. The completed form provides the legal name, address and type of entity of the vendor as well as the federal identification number for businesses or social security number for individuals. This information is required to file Form 1099-MISC.
Once the receipt of all W-9s is completed and the determination is made about which parties should receive a 1099-MISC, the reporting can commence. Some best practices to further simplify the reporting process are:
Also, it is important to keep in mind the due dates to avoid late filing penalties, which can be substantial.
A review of company practices should reveal where weaknesses in the 1099 reporting process may exist. A summary of best practice tips include:
Preparation and proper planning are the keys to seamless, efficient year-end 1099 reporting. Although the forms themselves are not complicated, the failure to have the required information beforehand can cause the process to be much more difficult and can increase the risk of penalties for non-compliance. When in doubt, it is always prudent to contact a tax professional to ensure compliance and to answer any technical questions that arise.
About Withum
Withum is a forward-thinking, technology-driven advisory and accounting firm, committed to helping clients be more profitable, efficient and productive in the modern business landscape.
For further information about Withum and the services provided to the hospitality industry, contact Lena Combs (LCombs@withum.com) or Chanda Horne (CHorne@withum.com) at 407-849-1569 or visit www.withum.com. (SPONSORED CONTENT)
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