A 1099 vendor is a designation, or flag, listed in each of the records in the vendor master file that is part of an accounting software package. If you designate a supplier as a 1099 vendor, the system will print a Form 1099 for the supplier as part of the 1099 batch processing that follows the end of the calendar year. The company then sends the resulting 1099 form to the supplier, which the supplier should use for tax filing purposes.
The software should not print a Form 1099 for any supplier for which the company has issued cumulative payments for the full calendar year of less than $600.
You send a copy of this report to the Internal Revenue Service (IRS). The intent of the 1099 vendor designation is to ensure that suppliers report the correct amount of income to the IRS for income tax reporting purposes.
You should apply the 1099 vendor designation to any supplier that has the following characteristics (this is a partial list):
- Professional services fees
- Commissions paid to non-employees
- Fees paid to independent contractors
- Taxable fringe benefits for non-employees
- Director's fees
- Fish purchased for cash
- Golden parachute payments
Generally, this designation is for a supplier entity that is not a corporation.
The best practice for designating a 1099 vendor is to have all suppliers fill out and submit a Form W-9, Request for Taxpayer Identification Number and Certification, before paying them. You can then infer from the Form W-9 what the proper designation should be.
It is also a good practice to have the Form W-9 updated on an annual basis, so that you continue to have the most recent mailing address on file for each supplier. Doing so always warns you of any organizational changes in a supplier; this is useful for updating the 1099 flag in the accounting software.