The Annual 1099 “Two-Step”

  • by parkhbr
  • Feb 22, 2017
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Step one. Remember that it’s January and you’re supposed to get 1099s out by… when was it again? Oh yeah, the 31st… Run frantically through your QuickBooks vendor list (if you’ve been keeping up with it) and figure out who you need to prepare a 1099 for.

Step two. Spend a few hours calling last years’ contractors and track down the information you need to get the forms filled out and delivered. Cross your fingers that the IT guy you used nine months ago manages to return your email in time. It took him seven weeks to get that invoice to you; hopefully he’s not on vacation again.

Every year clients (and sometimes CPA firms) manage to put off collecting the information they need to accurately report what was paid to contractors until the last week of January. It’s stressful, inefficient, and sometimes results in incomplete information submitted to the IRS. Oh, and if your practice operates this way, you’re actually not in compliance.

But there’s a solution!

Here’s how it’s supposed to work…

The sign on your building looks a little shabby, so you call your printer and order a new one. After going back and forth with you a few times on the design, you finally settle on a design and they give you a quote for $1,000, due upon completion of the project. This is when you send the printer a Form W-9, a Request for Taxpayer Identification Number (TIN) and Certification. You inform the printer that you’ll need a completed W-9 in order to make the payment. The printer complies, returns the form, creates your sign, and you make your payment. Done. You enter their information into your Vendor section of QuickBooks, and you’re ready to go next January.

Now, you have your sign, but you need it installed. So you call your local handyman to get an estimate. You want to add a few other items to the list of work for him to do, and he agrees to hang the sign, repair the handicap rail, paint the front door, and replace a missing tile for $750. You agree to this price, and just as you did with the printer, you ask that he fill out a Form W-9. He agrees, and goes about his business completing your work. Two days later, he’s finished, you’re happy, and he asks for payment. However, he hasn’t filled out the W-9. He says you can go ahead and pay him, and he’ll get it to you later. This is where it gets tricky; you want to pay him, because he’s already completed the work, but you need to have a completed W-9.

Luckily, the IRS has a solution for this situation…

It’s called Backup Withholding. In situations where an independent contractor has not provided you with their TIN, you’ve received a notice from the IRS that a TIN is invalid, or you’ve received a notice that you should withhold because the contractor has previously underreported earnings, you as the payer are required to withhold a flat 28% of the payment amount. The IRS exhaustively details this process in the 72 pages of Publication 1281, but the short version is you will need to withhold this amount, for any service provider you hire that you pay over $600 in a given calendar year, note it as a liability on your accounting, then fill out Form 945 at the end of the year and send this payment to the IRS by February 1st. If you submit an incomplete or incorrect 1099 will likely receive a notice from the IRS to begin withholding, which you should comply with, and you will need to send a first and potentially second “B Notice” to the contractor (these can be found in that long IRS publication mentioned above).

Sound like too much work? Well, in case you weren’t aware, there are penalties for filing late or incomplete 1099s. The fine increases the longer it takes for you to get the correct information – for 2017 the fines are to the tune of $50 per 1099 for 30 days late, $100 per 1099 after 30 days but before August 1st, and $260 per 1099 if not filed correctly until after August 1st, 2017. The fine skyrockets to $520 per 1099 or 10% of the reported amount, whichever is greater (with no maximum) if you just decide not to file them at all. So it’s absolutely in your best interest to get the right information from the contractors you work with, and backup withholding is generally a quick way to ensure they will provided you with the W-9 you need. This way, everyone gets paid, the IRS is happy, you’re not paying fines for non-compliance, and you don’t have to waste a lot of time every January calling vendors and getting last-minute information to file on time. Win-win!