When it comes to choosing the right cup or making the best decision, it is always nice to have a little help. Especially in the case of 1099s where the game seems to be changing so quickly that it is hard keep up with what your company needs to be doing. Therefore, it makes sense that many small business owners are confused about their 1099 reporting requirements at the end of the year. This topic proves particularly troublesome in a construction business, which may frequently use independent contractors. So what do you need to report?
Take the Guessing out of the Game: 3 Basic Rules for 1099s
Form 1099-MISC is the most common reporting form used by small businesses. Since the last few years have featured changes to the rules, a repeal of some of the changes, and then clarifications, is it any wonder that there’s confusion on which cup your ball should end up under?
Form 1099-MISC is used to report payments made to vendors that provide services to a business. In that statement alone there are some keys to what needs to be reported including:
(1) “To a Business.” First, the payments need to be made in a business, so you don’t have to prepare a 1099-MISC for the guy who cuts your home lawn!
(2) “Provide Services.” Secondly, the payment has to be for services—not goods, and that’s an important distinction. The person you pay must be providing a service to your business and not selling you something. Therefore, you don’t prepare 1099s for the purchase of materials, insurance, or newspaper advertising for instance.
(3) “To Vendors.” Many construction companies think of sub-contractors when they prepare 1099s, and that’s correct–to an extent. But don’t overlook the many other types of vendors that may be providing services to your business. Your CPA, graphic designer, maintenance person, and IT specialist are just a few that may fall within the reporting requirements.
Two Common Exceptions for 1099 Preparation (Because there always seems to be a few that don’t play by the rules.)
(1) You don’t need to prepare the 1099 if the vendor is incorporated. Whether the vendor is incorporated frequently seems to be the hardest determination for the business. An easy test is if the word “Inc.” is in the company’s name, then it’s a corporation. However, there are other names for corporations such as “PA,” so if in doubt, ask. Beware that a limited liability corporation (“LLC”) is not a corporation, and those companies should be included in your 1099 reporting. To make this job easier, be sure your accounts payable clerk uses the full legal name of the vendor, not just an abbreviation or shortened version of the name.
Of course, there are a few exceptions to the corporate rule. The most common exception is for attorneys; you are required to complete a Form 1099 for payments made to an attorney, regardless of whether they are incorporated.
(2) You also don’t need to prepare the 1099 if you pay less than $600 to that vendor in the calendar year. However, be sure to get a Form W-9 filled out by the vendor before making the first payment. If you don’t have a W-9 completed by the vendor, then you are required to withhold federal income tax from every payment! So don’t wait until the end of the year to get the information. You could be held liable for the federal withholding!
So, to sum it up, prepare a 1099 for a vendor who:
- Provides services.
- Is not a corporation.
- Receives more than $600 in a year from you.
Do you have any questions about this topic of 1099 reporting, or are you ready to ensure your company is playing by the rules? Or do you want to know how to set up your accounting program to capture this information?
