Form 1099 Best Practices for Year-End
What you need to know
To make smart business decisions.
For many companies, January is a mad dash of closing the prior year-end, making fourth quarter estimated tax payments, and sending out W-2s and 1099 forms. Below, we’re rounding up the rules around issuing 1099-MISC, 1099-NEC, and best practices for making 1099 season a little easier.
Who must get a 1099?
A 1099 is not one form, but actually a series of forms that report various types of income. For example, Form 1099-INT is used to report interest income, Form 1099-R is used to report distributions from a retirement account, etc. You can read more about the different types of informational returns in the IRS General Instructions for Certain Informational Returns. This article will focus on Form 1099-MISC and 1099-NEC.
By January 31, businesses are legally required to issue Form 1099-MISC to anyone whom they made the following types of payments:
At least $10 in royalties
At least $600 in:
Rents
Prizes and awards
Other income payments
Medical and health care payments
Payments to an attorney
Businesses are also required to issue Form 1099-NEC to any nonemployees (independent contractors or freelancers) who you paid at least $600 during the year. (Prior to 2020, Form 1099-MISC Box 7 was used to report these payments).
Form 1099-MISC and 1099-NEC detail how much money the issuer paid the recipient during the year. The IRS uses its copy of this form to ensure that the revenue reported by the recipient is correct.
The trouble for many businesses is that they don’t collect the required information, including the recipient’s full name, address, and tax identification number, until sometime in mid-January when the deadline is looming. At that point, potential recipients may be unresponsive or simply refuse to provide the necessary information. Thus, completing 1099s by the IRS due date becomes a substantial problem.
One way to ease the January scramble is to withhold payment to any contractors or suppliers until they complete and submit Form W-9 or W-8 to your accounts payable department.
What is Form W-9?
Form W-9, Request for Taxpayer Identification Number and Certification, is used to collect information from U.S. vendors and contractors. It requires the vendor or contractor to provide:
Legal name and/or business name
Structure of their business (i.e., sole proprietor, corporation, S corporation, LLC, etc.)
Mailing address
Taxpayer identification number (Social Security number or Employer Identification number)
It also requires the vendor or contractor to certify that they are not subject to backup withholding at a rate of 24%.
You may not need to send a 1099 to every vendor or contractor you pay during the year. You don’t need to send a 1099 to:
Entities that are structured as corporations, including LLCs that elect to be treated as S or C corporations
People/businesses that received less than the $600 reporting threshold
People/businesses that you paid by credit card or a third-party payment processor, such as PayPal. Those amounts are reported on a 1099-K issued by the merchant or payment network.
People/businesses that you paid only for merchandise, freight, storage, telephone or similar items
Still, it’s a best practice to collect W-9s from all vendors before issuing any payments.
What is Form W-8?
Form W-8 is actually a grouping of tax forms designed specifically for non-resident aliens and foreign businesses who have either worked in or earned income in the U.S.
Form W-8BEN
Non-resident aliens are generally subject to a 30% tax on certain U.S. source income, including compensation for their services. However, foreign persons from a country with which the U.S. has an income tax treaty may possible claim a reduced or zero percent withholding rate.
To claim treaty benefits, the nonresident alien must provide the U.S. payor with information certifying their eligibility to do so. The required information is provided on Form W-8BEN.
Form W-8BEN-E
Form W-8BEN-E is similar to Form W-8BEN, except it’s designed to be completed by businesses rather than individuals. It allows businesses operating outside of the U.S. to claim an exemption from the mandatory 30% withholding on U.S.-sourced income.
What should I do with Form W-9 or W-8?
Once you’ve collected Form W-9 or Form W-8 from suppliers, it’s important to validate the information provided. You can do this by checking the information contained on Form W-9 or Form W-8 against the IRS TIN Matching tool.
IRS TIN Matching
The online TIN Matching tool is a free web-based service that allows businesses to check the TIN furnished by the payee against the name/TIN combination contained in the IRS database before filing an informational return.
There are two TIN matching options:
Interactive TIN Matching – verify up to 25 name/TIN combinations and receive results immediately. There is a limit of 999 requests during a 24-hour period.
Bulk TIN Matching – Verify up to 100,000 name/TIN combinations and receive the results within 24 hours.
To use either TIN-matching services, your business must register for the IRS e-services. You can learn more about the TIN Matching program in IRS Publication 2108A.
If you haven’t collected a W-9 or W-8 series form from your vendors and contractors, do it now. And make it a policy to request a W-9 or W-8 from any person or business before issuing payments in the future. This is a surefire way to avoid the frustration of not having the information you need to issue a 1099-MISC when the time comes.
If you need help determining who gets a 1099, schedule a call with Slate. We can handle collecting the right information and issuing the right forms so you have more time to focus on what you’re best at — running your business.