Post written by Angie Geer, Bean Counter | Proud Mama | Doting Wife | Cooking Enthusiast | PTA Volunteer (Sucker)
Most small business owners have a solid grasp on how to properly handle their employees, but what about their 1099 vendors?
1099 vendors have a tax obligation too, but they can’t report properly unless we do things right on our end.
Designating who is a 1099 vendor isn’t as cut and dry as you might think and there are many factors involved, so I wanted to take a minute to cover some of the basics.
Any individual (non-employee), partnership, or LLC who is an independent contractor, provides a professional service, or receives a commission is eligible to receive a 1099 if they were paid over $600 in the calendar year. Attorneys are to receive one as well, despite the amount they were paid.
#1: POOR RECORD KEEPING
Before you pay them, have every 1099 vendor-prospect complete a W-9 to keep on file. This form indicates what type of entity they are and provides their SSN/EIN for your records. Mark them as a 1099 vendor in your accounting software so that they appear on your report if they meet the $600 threshold at year-end.
#2: TREATING AN INDIVIDUAL AS AN EMPLOYEE AND A 1099 VENDOR
Many think it’s ok to cut an employee a check outside of payroll for work outside of their usual scope. An individual CANNOT be treated as an employee AND a 1099 vendor…it’s either one or the other.
However, they can be treated as both within a calendar year if they’re working circumstances truly change and they’re converted from a 1099 vendor to an employee (or vice versa).
#3: FAILURE TO ACCOUNT FOR ALL MONIES PAID TO A 1099 VENDOR
There are times when it’s convenient for a business to pay out cash to a 1099 vendor. Just because there’s no paper trail doesn’t mean you don’t have to report it. Get help from your accounting professional on properly recording these cash transactions so that they’re tied to the 1099 vendor.
#4: SENDING A 1099 TO A VENDOR WHO ISNT ELIGIBLE
When in doubt…send one. If it wasn’t required, there’s absolutely no harm done.
#5: FAILING TO SEND A 1099 TO A VENDOR
Failing to send a vendor a 1099 could incur a penalty between $50-$260 per return from the IRS. It’s important to be diligent in your process. The best time to determine if a vendor is 1099 eligible is from the beginning. Make your determination and track accordingly. Remember: When in doubt, flag them and talk to your accounting professional.
Thank you for taking the time to read the Virtual BeanCounters blog! If you have any questions about this post or any other questions, give us a call at 913.649.1040.