January 31st is the deadline for submitting 1099s to recipients. If you are a business owner, CFO, Controller or responsible for your company's accounts payable department or tax filings, you may know that 1099s are an informational return that is required to be filed with the IRS to report individual income that is not reported on a W-2 as wages, salaries or tips. There is often some confusion about the 1099 process and related rules, and the January 31st deadline sometimes sneaks up on companies.
Here are some high-level tips to ensure you are in compliance with your 1099 obligations. I'm going to focus on the rules that apply to payments by Accounts Payable departments to vendors and service providers (partnerships, contractors and individuals) and not on other 1099 rules that apply to payments to investors for interest, capital gains or dividends. Those rules are specific to the financial services industry and are usually handled by your banks, brokerage firms, or similar financial services companies.
The specific instructions for who must file are included on each type of 1099, of which there are many. The most common 1099 form that impacts companies' payments to vendors (such as through the Accounts Payable department) is 1099-MISC. This form is used to report things like rent or royalty payments, payments for services performed for a trade or business by people not treated as its employees, certain payments of gross proceeds to attorneys, TV or radio show winnings, payments in the fishing industry for cash purchases of fish or to fishing boat crew members, and several other specific payments. See the IRS Guide to Information Returns for more detailed information about the 1099-MISC and other 1099 forms.
What Do I Need to Know About 1099s?
At a high level, the main things an Accounts Payable department needs to know about 1099-MISC is:
- Which vendors might need to receive a 1099-MISC and;
- What triggers the need to send one, including the dollar threshold and types of services paid for.
Generally speaking, a good rule of thumb for determining who should receive a 1099-MISC is, if they are not a corporation and not treated as an employee, they should probably receive a 1099-MISC. For example, individuals and partnerships might need to receive a 1099, provided they meet the payment threshhold.
If your vendor is a service provider, and is a sole proprietor, contractor or partnership, then you should look to see if total payments to that vendor for services during 2019 were $600 or more. If so, you should send that vendor a 1099-MISC.
The following types of payments do not require a 1099-MISC:
- Payments for services to persons treated as employees
- Payments to corporations (with the exception of payments for legal services - those need to be reported even if paid to corporations).
- Payments for merchandise, telegrams, telephone, freight, storage and similar items
- Payments of rent to real estate agents. But the real estate agent must use Form 1099-MISC to report the rent paid over to the property owner.
- Payments made via credit card. Merchant card companies will report those payments to the IRS on a special form, 1099-K.
How and When Do I File My 1099s?
The deadline for distributing 1099s to vendors is February 1st. If you use paper 1099s, you must then file another information return, Form 1096, to transmit the 1099 information to the IRS by February 28th. If you use an authorized provider of electronic 1099 transmission, no form 1096 is required and the due date for eFiling is March 31st.
What is the Penalty for Failing to File 1099s?
Specifically, not providing a correct statement (intentional disregard) carries a penalty of $270 per 1099, with no maximum for the year. Penalties for failing to file 1099s or filing them late are as follows:
- $50 per 1099, if you file within 30 days of due date; maximum penalty of $194,000
- $100 per 1099, if you file more than 30 days after the due date but by August 1; maximum penalty of $556,500
- $270 per 1099, if you file after August 1; maximum penalty of $1,113,000
What Can I Do to Make the 1099 Process Less Painful in 2020?
It's too late to do much between now and January 31st, 2020 to improve your 1099 situation. But you have a whole year to make the 1099 process easier next time. Here are some things you should plan to do during that time:
- Make sure you have a W-9 on file for all your vendors. A W-9 is a form you are required to get from the vendor before any payments can be made to them, and it includes key information like their federal tax ID number and the type of entity they are, which you will need in order to determine if they get a 1099.
- Consider using an electronic filing service such as www.tax1099.com. They can automate a lot of the process for you, save you from having to buy, print and mail paper 1099 forms, and help you avoid having to file a Form 1096. If you do decide to use an electronic service, you'll need an e-mail address for every vendor who will receive a 1099, so allow enough time to gather that information.
If you're a Sage Intacct customer or you'd like to see how 1099s are handled with that product, take a look at these video guides from one of AcctTwo's Solution Architects: https://info.accttwo.com/sage-intacct-1099-videos.
You could also consider outsourcing your accounts payable function. Firms who provide outsourced accounts payable usually will help you with the 1099 process as well. Contact us or fill out the form below if you would like to learn more about how AcctTwo can assist you with the 1099 process or provide outsourced Accounts Payable services.