Tips and Tricks for Filing 1099 Forms for Your Contractors and Vendors
1099-Form processing is due January 31st and this can be time consuming, confusing and anxiety driven for many companies. If you haven’t processed a 1099 lately, need a refresher, or have a few questions, you may find these tips from our expert panel helpful.
You’ve likely seen the shift as the workforce changes from the traditional, full-time employment model to an on-demand extended workforce model. Businesses across the globe, big and small, have taken note of this next iteration of the subscription economy and are moving purposely to this new way of managing their workforce.
As with any significant change in business process, there are new rules to learn. One of the biggest challenges for businesses in navigating this trend is determining what, who, when, and where the tax liability falls within the business/contingent workforce relationship. We reached out to several experts -including a few here at ADP- and asked them to share their top tips and tricks to seamlessly process 1099s.
Here’s what they had to say:
As a baseline, we define a 1099 filing as a series of information returns that report the various types of income a freelancer may receive, and is used for that contingent worker to file his or her own taxes.
Q: Are there different kinds of 1099 forms? Which ones are relevant to my contignent workforce?
Our Take: Yes, there is the 1099-M, or 1099-Misc, and the 1099-K. The 1099-M is for nonemployees who are not incorporated and is used to report all payments including: rent, services, prizes and/or rewards, medical & health payments or attorney’s fees, as well as other payments such as punitive damages. The 1099-K is the form specific to organizations such as banks, Lyft, or AirBnB online platforms. The 1099-K is used to report specific credit card transaction payments sent to a vendor on the platform. The threshold for reporting to the IRS is a minimum of 200 transactions or $20,000 in gross receipts, and unlike the 1099-M, this does apply to corporations as well as sole proprietors and reports the gross income, not net.
Q: What is the threshold to determine if my contractor is a 1099 qualified contractor or another classification?
Megan Gerhardt, CPA, Outsource CFO: Any 1099 contractor or company who received $600 or more and that you are paying with cash, check or wire transfer, would receive the 1099M. If those payments were from a credit card, they would fall under the 1099k and the credit card processor is responsible for issuing that to the contractor.
Exceptions, however, apply to a C-Corporation or S-Corporation. They do not get a 1099 and the tax liability is on the corporation to report earnings. However, it is recommended that you obtain a W-9 from any contractor you do business with, regardless of their corporation status.
It is not always immediately apparent on what their filing status is, and the W9 protects your business as the form has a disclaimer indicating the business requesting the form is not subject to backup withholding. The IRS can (and will) come to you to ask for backup withholding for contractors you have contracted with in the event the contractor fails to pay student loans, child support, or even failure to file their own IRS taxes and the disclaimer removes you from liability.
Our Take: It is important to validate every SSN, EIN, and/or TIN number prior to filing the 1099. If the IRS receives the form and finds a mismatch, they will issue a CP2100. The first issuance will be a warning, but if the same erroneous information is submitted subsequent times, penalties will start to apply. Businesses can verify a contractors TIN, SSN, or EIN status through the IRS.
Q: Are there penalties for missing the deadline?
Megan Gerhardt: There are 2 deadlines that businesses need to be aware of. The first is that the contractor must receive the Form 1099M by January 31st, however most will not be penalized if the form is postmarked by that date. The second deadline is February 28, when penalties will begin to apply. Penalty fees are dependent on the size of the return and how late the return is, ranging anywhere from $50 to $3.2 Million. A full description of the penalties and qualifications can be found on the IRS website.
Our Take: To protect yourself be sure to timestamp the 1099’s as the end of the business day depends on the local time zone.
Q: How can I streamline the filing process for my contingent workforce?
Our Take: If you are filing more than 250 1099s, you are required to file electronically. If it’s below, you can choose to file via paper though you may find e-filing easier and faster. Something else you should be aware of is that you must file a 1099 with both the state of the contractor and the IRS. Some states collaborate to file electronically with the IRS but some don’t. Be sure to check the requirements in the state where you need to file.
See below for list of states that combine that participate in a combined filing program for 1099s.
Q: What happens if I fail to file 1099s for my contingent workforce?
Megan Gerhardt: If it is determined that you have failed to file intentionally, the penalties are significant and the IRS has no maximum penalty. Minimum penalties for intentional disregard range from $250-$550 per form.
Q: What if my entire workforce is a contingent workforce? How does that change my filing process and business liabilities?
Megan Gerhardt: If your entire workforce consists of contractors, it doesn't change the process or liability.
Q: What happens if a contractor changes their SSN to an EIN during the tax year?
Our Take: You will need to send a 1099 to the contingent worker for both the SSN and EIN with the total earned under each number, as taxes are still counted for both.
Q: What if I have a 1099 contractor that is a U.S. citizen but works overseas?
Megan Gerhardt: Regardless of the country the contractor now resides in, they are still required to get the 1099M. They are still considered a U.S. Citizen and are classified as an “expat.” The contractor located overseas should contact a tax preparer in their country of residence as they will have to pay taxes to both entities but the US may be refunded depending on the rules.
Q: Are there any requirements for specific industries?
Megan Gerhardt: Any entity including individuals that engage contractors are required to file a 1099 for their contractors who have exceeded the threshold. There is no special exceptions or changes for a business depending on their industry or status (ie. non-profit, for profit, etc).
Q: How will the future of work and the demand for an extended workforce of 1099 contractors affect my business in the years ahead?
Megan Gerhardt: The switch over to contractors will be a great strategy for businesses because they can hire on demand exactly what they need and only for the time that they need it. Ultimately, it could make businesses more profitable because they don’t have the initial overhead costs to have a full time employee.
Looking for more best practices to help organize, manage, and pay your 1099 contractors? Download our guide here to learn more.
Disclaimer: This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. WorkMarket, an ADP company does not warrant or guarantee the accuracy, or reliability of the content on this blog.