Form 1099 Compliance (#283)
/In this podcast episode, we discuss how to deal with the Form 1099. Key points made are noted below.
Background on the Form 1099
For those not involved in accounts payable, the Internal Revenue Service requires that the 1099 form – and there are a bunch of variations on it – be compiled following the end of each calendar year to show the grand total of different types of payments that businesses have made to third parties. A copy goes to the IRS, and the applicable state government, and to the third party that was paid.
Why is this important? After all, it’s just an informational return. The payables department isn’t submitting a payment along with the return. Well. The IRS uses it to uncover cases in which payments have been made to suppliers that it might not otherwise have been aware of. And it serves as a useful memory jog to the supplier, who now realizes that the IRS knows that they were paid something, and just might start making inquiries if those payment amounts aren’t included on its income tax return.
In particular, let’s talk about the listener’s question about how accurate these forms are supposed to be. The answer is – very accurate. If you’re not accurate, you’re screwing over the supplier, who has to explain to the IRS why the amount reported on the Form 1099 is incorrect in some way. This brings up a few best practices to implement.
Form 1099 Best Practices
First, a major component of a Form 1099 is getting the taxpayer identification number right. To do so, always require suppliers to provide a Form W-9 before you ever pay them any money. And if you don’t know, the Form W-9 requires the supplier to document its taxpayer identification number and the type of organizational structure. In fact, it’s called the Request for Taxpayer Identification Number and Certification.
Requiring a Form W-9 right away is essential, because at that point you have all sorts of bargaining power over the supplier. Which is – you don’t give me a W-9, I don’t give you a payment. This is important for another reason, which is that, if the supplier can’t provide a taxpayer identification number, then you have to withhold 24% of each payment and forward it to the government. If you don’t do that, then you’re liable for the withholding. So, it makes all kinds of sense to get a W-9 right away.
Another best practice is to review the payables records well in advance of year-end to see if any suppliers are being paid through several different vendor accounts. You might need to consolidate these accounts so that a single Form 1099 can be issued.
And speaking of starting early, a third best practice is to do a full review of the detail for all proposed 1099 forms a month before year-end. Examine each expenditure to make sure that belongs on the 1099, and that it’s going to be stated in the correct box on the form. Otherwise, you’re going to be in a rush to do this review in January, since the completed forms – in most cases – have to go out by the end of January.
It makes sense to straighten out these problems up front, because if you send out a 1099 that’s wrong, the IRS will eventually send back what’s called a “B” notice, saying that you got something wrong – it’s usually the taxpayer identification number. Which means that you have to research the problem and then issue a corrected 1099 – all of which takes time. And along the same lines, it’s quite possible that suppliers will take issue with the numbers you stated on their 1099s – which means that you have to spend even more time dealing with irate suppliers, and doing even more research based on their complaints. So, in short, do as much work up front as possible, to avoid problems down the road.
Let’s try a fourth best practice. Set up a procedure with the mail room staff, where any 1099 mailings returned by the Postal Service as having incorrect addresses are sent straight back to accounting, to be fixed. When these forms show up, drop everything, figure out where the supplier went, and mail it out again. Otherwise, imagine the situation from the perspective of the supplier. The IRS comes after them for income that the IRS was warned about, but which the supplier never received from the company. Kind of like being blindsided.
Form 1099 Penalties
You may not think that you have time for this, and it’s just fine for me to talk about your responsibility to issue accurate filings. OK. Let’s talk about penalties instead. The IRS recently changed its penalty system for late or missing 1099 filings. If your company has sales of at least $5 million, and you submit 1099s a month late, then the IRS will only charge you $50 per missing return, with a maximum penalty – get this – of $556,000. And what if you never send one in? Then the penalty is $550 per return, with no limit on the maximum penalty. And there’re increasing penalties if the filing is later than one month.
What if your company is smaller than $5 million in revenues? Then the penalties per missing form are the same, but the penalty caps are smaller. So for example, if a smaller business only submits a 1099 a month late, then the maximum penalty is reduced to about $195,000. That’s a lot of money for a small business. And there’s no cap at all on the penalty if the 1099s are never turned in. So, yes, you want to do a good job with 1099 filings.
Elimination of the Form 1099-MISC
And one more topic. A listener requested that I talk specifically about the Form 1099-MISC. The trouble is, that’s not really the form anymore. The key part of this form, which is the nonemployee compensation box, is being moved to the Form 1099-NEC as of the calendar year 2020. Nonemployee compensation is by far the most commonly-reported item on the 1099, so just be aware that you’ll be dealing with a new form right after 2020 is over.