January marks one of the busiest times of the year for accounting teams. Companies have a 31-day window to deal with the year-end close, issue W-2s, and meet 1099 reporting requirements. IRS 1099 forms document payments made to a person or a business. Payers send this form to the party paid, the IRS, and, if applicable, the state taxing authority.
Issuing 1099s is a crucial part of US tax reporting requirements, so here are the top considerations your accounts payable team needs to understand about 1099 reporting requirements.
What is a 1099 Form?
A 1099 form is an informational tax form used to report various types of income payments in the US. Despite the alphabet soup of 1099 forms, with names like 1099-K, 1099-B, and 1099-Q, there are two forms that are most commonly filed. These popular forms are the 1099-NEC and the 1099-MISC.
1099-NEC for Non-Employee Compensation
1099-NEC is a form for freelancers, independent contractors, or self-employed individuals who earned $600 or more during the year. You should also issue this form for payments to a limited liability company (LLC) that is not filing as an S corporation. The LLC’s Form W-9 will indicate its tax filing status.
Issuing a 1099-NEC form may not be required in some cases, like in the following situations:
- Payments to C corporations or S corporations, except for attorney services, medical or healthcare payments, which should be reported using 1099-MISC
- You hired non-U.S. taxpayers where foreign contractors performed the work outside the US
1099-MISC for Miscellaneous Information
1099-MISC records payments such as awards, royalties, prizes, rent payments, other income, and medical and health care payments. They cover the payments made by a trade or business, excluding nonemployee compensation.
The IRS site offers a list of other types of 1099 forms to report payments like dividends and distributions, proceeds from broker or barter transactions, and more.
When is the 1099 Form Due?
For 2024, businesses have to send payees 1099-MISC and 1099-NEC statements by January 31. The non-employee Compensation form 1099-NEC should also be filed with the IRS by January 31. For the other 1099 forms, the IRS due date for paper filing is February 28, and the due date for forms filed electronically is March 31. Most states have similar deadlines, though you will need to check with each state’s tax authority to see if filing is required.
If you don’t send your 1099 reports on time, penalties can range from $29 to $50 per form. The minimum penalty for companies that intentionally disregard reporting is $580 per form. The IRS also charges interest on penalties.
Best Practices for 1099 Tax Reporting
Given the competing priorities at the start of the year, AP teams have to process 1099 forms with speed and accuracy. Here are some considerations to keep in mind to make 1099 reporting as painless as possible.
- Classify hires as W-2 or 1099 workers. In general, employees receive W-2 forms, while contractors receive 1099s. Refer to the IRS guidelines that look at three categories – behavioral, financial, and type of relationship – to determine if a worker is an independent contractor or an employee.
- Require all vendors and contractors to submit W-9s or W-8s during onboarding. U.S. Citizens and Residents use the Form W-9 (Request for Taxpayer Identification Number(TIN or SSN) and Certification form) to provide information like name, address, and TIN. Non-U.S. tax residents and companies use Form W-8 to provide tax filing information. You never know if payments will amount to $600 or more and you need to satisfy 1099 reporting requirements. If the W-8 or W-9 is missed during onboarding, ask for these forms before issuing payment.
- Keep Accurate Records. Make sure to update postal addresses for your contractors and vendors who need to receive a copy of the 1099 form. Maintain detailed records of all payments made.
- Complete all relevant fields when setting up a new vendor profile in your accounting software. A complete vendor profile includes information like the address, legal business name, entity type, and tax ID, usually from Forms W-8 or W-9. With a complete record, your accounting software may be able to generate 1099-relevant information automatically at year-end, simplifying the 1099 process in accounts payable.
- Update Vendor Information Annually. Make vendor housekeeping an annual activity for your AP team. If you received an IRS B-Notice letter that notifies you that there are matching errors on the name or TIN on the 1099s submitted, ask for an updated W-8 or W-9 from the vendor with the incorrect information.
- Monitor vendor payments made through credit cards or other third-party processors. Payment processors like Paypal or Venmo and credit card companies issue 1099-K for payments received. So, you have to exclude these transactions from your 1099 reports to avoid double reporting.
- File the correct 1099 form on time. There are many 1099 forms – make sure that you are filing the right forms– and don’t miss the 1099 form deadline to the IRS or the states that require 1099 reporting. Otherwise, penalties may apply.
- Automate accounting and AP processes. Staying on top of tax reporting requirements and closing company books while supporting day-to-day operations increases the AP workload, especially for companies with manual accounting systems. Having an automated system with vendor management capabilities is critical to achieving easier reporting. Clean vendor records can support 1099 reporting requirements and prepare the department for internal and external audits in the coming months. Invest time and effort to ensure proper vendor management, so that your AP team doesn’t have to get buried with work when it’s tax time.
Make 1099 Tax Reporting Easy with AP Automation
A new year doesn’t have to be stressful for your company – especially for your AP team. Automating tasks reduces the manual effort required to complete day-to-day transactions, generate year-end reports, and achieve compliance. Higher efficiency and productivity help you submit 1099 forms on time, streamlining the 1099 process in accounts payable.
Smart accounts payable systems like SoftCo eliminate manual steps by making it easy to keep track of all vendor transactions and information in one platform. Automation makes tax reporting and compliance effortless, reducing the burden on your AP team. With SoftCo’s AP automation and vendor management solutions, your AP team can work smarter and faster.
