Why are 1099s still such a struggle? For the last 10 years I have worked with dozens and dozens of small businesses, and it seems like nary a one obtains a W-9 form from a 1099 vendor before they start working with the subcontractor. Even those with whom I have been working for years, and whom I thought I had well-trained, will cut a check to a new 1099 vendor without asking for a W-9 form. Unfortunately, I don’t have a slick answer or magic bullet for this issue. So we must rely upon our Best Practices to help protect our clients.
Earlier this year the IRS updated its 20-factor test for determining whether a worker is an Independent Contractor (IC) or an employee and dropped the test to three factors (as copied directly from the IRS website):
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
I like how these rules are direct and unambiguous. How refreshing!
Here are my Best Practices for keeping your clients in compliance on 1099 rules for the simpler stuff.
1. Have a written contract with your 1099 Vendors, in particular bookkeepers, website developers, and small IT firms. Keep in mind the title of the 1099-MISC Box 7 is “Non-Employee Compensation.” The title of that box is clear and concise. If you paid a non-employee some compensation, they are most likely a 1099 Vendor, unless they are a C-Corp.
2. Obtain a completed and signed W-9 form before you make your first payment to a 1099 Vendor. It can be difficult, frustrating and time-consuming to attempt to obtain one after they have been paid. If you don’t have a W-9 form, your client is supposed to make backup withholding at 28% for the IRS and 7% for California (rates may vary in other states). How many of you are actually doing this?
3. Payments to attorneys and medical corporations are eligible, even if the payee is a Corporation, and 100% of amounts paid should be reported, even if below the $600 threshold.
4. Send a 1099 to landlords for rent (1099-MISC form Box 1). This is so often overlooked.
5. Expense reimbursements to Vendors should be included in their 1099. I’ve had arguments with clients and vendors on this subject for years. The Vendor cries, “Why are you sending me a 1099 for my reimbursed expenses? You should only 1099 me for my service fees.” Not true, Mr. Vendor. Let’s say I paid you $1,250 in the calendar year, $1,000 in service fees and $250 in expense reimbursement. I will then 1099 you for $1,250, which is the amount I have paid you in Non-Employee Compensation. I’m guessing you will claim $1,000 on your tax return as revenues and $250 on your tax return as deductible expenses. But dare I suggest you should actually claim $1,000 as revenues, and $250 as Reimbursed Expenses Income, because that is what I paid you? You can then deduct your $250 in expenses, and they will be a wash. It is not my job to wash them for you.
6. Protect W-9 form information. Don’t ask a Vendor to email you a W-9 form – email is not secure. Provide them a way, on behalf of your client, to submit the W-9 using a secure electronic file sharing service such as Hightail (formerly YouSendIt), SmartVault or ShareFile. Even Dropbox is better than email. If a paper W-9 form arrives at your client’s office, advise your client to store W-9s in a locked cabinet, as they would any other confidential HR document. Many IC’s use their Social Security Number and home address on the W-9 form, so help protect them from identity theft.
7. Run a 1099 report once a quarter for the current year, to verify you have all the 1099 information in the accounting software. For QuickBooks Desktop, this is an easy task. Currently, it is a bit more difficult in QuickBooks Online, but Intuit is working on 1099 improvements this month. I am not familiar with the 1099 reports in other accounting software packages. The point is, don’t want until January to discover you are missing W-9 forms for multiple Vendors and across multiple Clients. Doing the work quarterly during the year avoids headaches and hassles in January.
8. Keep in mind all IRS 1099-MISC filing deadlines such as Vendor copy due by January 31st; IRS paper filing due by February 28th; IRS electronic filing due by March 31. For the past three years I no longer prepare paper 1099s. I have converted to an electronic 1099 filing service, which I find to be easy to use, secure and affordable. These services include Track1099.com, efile4biz.com, and many more. Most of these will sync with the popular accounting software packages, reducing manual data entry. Intuit also offers a 1099 filing service. In general, the way they work is to send an email to the recipient with a link for them to securely download, save and/or print their 1099. So you must have an email address for each Vendor. Some of these firms now offer electronic W-9 form collection services too. I love it! Do your research and choose the one which makes the most sense for you.
9. Don’t forget that if Vendors were paid by credit card, instead of by check, the merchant service will send them a 1099-K and you won’t be sending them a 1099-MISC. In QuickBooks, credit card payments to Vendors will not appear on 1099 reports, which may give you pause as you review a 1099 report and just know that Vendor was paid over $600, so why are they missing from the report? If your client paid them by credit card, that’s why they are missing.
10. There are more kinds of 1099s than just the 1099-MISC. Stay up-to-date on 1099 rules. Attend webinars, read articles, watch for IRS notices. There are many things to pay attention to, so pay attention. Here is another good IRS link: https://www.irs.gov/instructions/iw9/ar02.html
11. If you client is still non-compliant when it comes to collecting W-9 forms from their IC’s, just remind them there are potential financial penalties for not collecting W-9 forms.
Best Practices for Your Firm
Obtain your own FEIN. Even if you are Sole Proprietor, you can obtain a FEIN for your dba from the IRS. Personally, I don’t want to put my Social Security Number and home address on a W-9 form I am sending to my clients, so I have an EIN and a P.O. Box.
Service Agreement: Most bookkeepers are Independent Contractors providing Non-Employee Compensation services. Be a professional and create a Service Agreement for your clients, and provide them a completed W-9 form with your Service Agreement.
Email Address: Often my clients want to create an email address with my name in it, using their domain, so their Vendors can send Bills and other correspondence directly to me. I recommend instead the client create a more generic email address with their own domain such as bookkeeper@ or accounting@, and then behind the scenes have that email forward to me. I do not want to breach the IC barrier by having an email address with my client’s domain name – that makes me look like an employee.
Create Real Invoices: Always send your client a real Invoice for your services. A real Invoice has:
• Your company name
• Your remittance address
• An invoice date
• An Invoice number
• A description of the services provided
• A rate and/or total amount due
• Payment Terms/Due Date
A real Invoice does not look like a timesheet – remember, you are not an Employee. Many of my clients receive so called invoices from other ICs which simply have the IC’s name and a listing of the days worked and hours worked, which to me looks like a timesheet. I will advise my clients to reject these “invoices” and request a real Invoice from their IC service providers.
More Complicated Stuff
TIN Verification: The IRS requires TIN (Taxpayer Identification Number) verification, however only a registered tax preparer can use the IRS TIN matching service. For more information, visit:
State Forms: Some states require you to obtain a local version of the W-9 form, such as California’s DE-542 form, Report of Independent Contractor(s). The California form states, “This information is used to assist state and county agencies in locating parents who are delinquent in their child support obligations.” Find out if your state requires such a form.
LLC’s: In January 2015, the AIPB (American Institute of Professional Bookkeepers) wrote this in their newsletter,
“The IRS says that payments to an LLC are not exempt from 1099 reporting—unless the LLC elected to be taxed as a corporation for federal income tax purposes. If it does not make this election, the LLC is a partnership or a disregarded entity likely taxed as a proprietorship.
AIPB tip: Collect TINs from all LLCs to which your firm makes payments. Issue 1099s to all who receive more than $600 from you during the tax year. Exception: If an officer or owner of the LLC states in writing that the entity elected to be taxed as a corporation for FIT.”
Non-US Citizens or Resident Aliens: Request a W-8BEN form instead. For example, a U.S. employer working with a Canadian IC who lives in Canada should request this form from the subcontractor.
The subject of 1099s is a complicated subject. I am not an attorney and this article is not legal advice, it is intended to be Best Practices. When in doubt, go to the IRS website, ask your tax preparer and/or check with your State’s laws.