It’s January and if you’re a small business, that probably means you’re trying to figure out just who you’re required to send a Form 1099 to, how much, and what kind. Let’s dive into the top questions we get asked each year.
Can I pay this person as an independent contractor?
Remember The $64,000 Question? Well, this is it. The consequences of not getting this right can be costly. When in doubt, always go directly to the IRS for your answer. Here, they say “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” The control then gets separated into 3 broad categories: behavioral, financial and type of relationship. Most often we see our clients exert some control over these relationships and advise that they should pay them as employees. You can read more about Independent Contractor vs. Employee relationships here: https://tinyurl.com/2exju7um
I got a W9 from the vendor I paid – how do I know whether I send them a 1099?
In our blog 3 Great Reasons to Get a W9 From A Vendor Before You Pay Them A Dime, we talk about some common issues facing small businesses with vendors and W9s. A W9 is simply a request for the vendor’s tax identification number, and more importantly, it tells you their federal tax classification (individual/sole proprietor, C corporation, S Corporation or partnership).
Most folks know that the threshold for issuing a 1099-NEC to a vendor is $600, but not much else. In general, if you have made a non-income payment over $600 to a non-employee, it’s reported in box 3 of Form 1099-NEC. However, if this payment was made by a third party (via your credit or debit card, PayPal, Venmo, etc) you are not required to report it. Also, if the vendor is a C or S corporation, the payments are not required to be reported. Be careful though! Attorneys, regardless of their federal tax classification, will still need to get a 1099 from you. If you lease space, you should also be sending a 1099-MISC to your landlord, reporting the rents paid in box 1. Find out more here: https://www.irs.gov/instructions/i1099mec
I paid a vendor but didn’t get their W9, now what?
In a perfect world, we’d all have a perfect BMI and be independently wealthy too. Life happens and sometimes, other people don’t play nice. You should attempt to obtain the W9 from the vendor and document it in writing (called “solicitations”).
The IRS requirement states that the first request should take place initially upon starting a business relationship. The second request (first annual solicitation) should happen by December 31 of the same year in which you started working together (or by January 31 if you just started working together in December of the preceding year). The third request (second annual solicitation) should happen by December 31 of the next year.
If you are still contracting (paying) the vendor, you must begin backup withholding of 24% immediately. The money that you withhold should be reported on Form 945. You will still have to file a Form 1099-NEC; however, it cannot be filed electronically, it must be a paper form. In the box where the taxpayer identification number would be, you write “REFUSED.” The form must still be sent to the vendor.
Tax time can be stressful for small businesses. Filing 1099s doesn’t have to be.