Startup guide to filing 1099s

Companies of all sizes who pay contractors and vendors are required to file Form 1099, which reports the contractors’ income to the Internal Revenue Service (IRS).

Although the task of filing a single 1099 is more straightforward and cost-effective compared to handling payroll taxes and W2s, things get more complex when dealing with multiple nonemployee payments. Managing a total of 17 different forms, each with distinct reporting requirements, can be challenging.

Navigating this process may lead to various questions, such as determining the appropriate form for freelancers, reporting credit card payments, and addressing discrepancies between Employer Identification Numbers (EIN) and vendor names.

Below we cover the basics of filing 1099s, as well as the proactive steps you can take throughout the year to prepare.

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What are 1099s?

IRS Form 1099 reports nonemployee income earned by a business or an individual during the year. The payer is responsible for issuing the form to vendors and filing with the IRS at the end of the year. 

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Who receives a 1099?

A Form 1099 is typically required for vendors if your business paid them more than $600 during the year, and they fall into specific categories. It's important to calculate the total payments in January once all transactions for the year have been settled. Here are common categories for which you may need to file a 1099:

• Freelancers or independent contractors classified as individuals, sole proprietors, or single-member LLCs should receive a 1099. This category may include include consultants, designers, and paid influencers. 
• Partnerships or an LLC that files as a partnership should also receive a 1099. 
• Regardless of their tax classification, law firms must receive a 1099. This requirement applies even if a law firm is classified as a corporation or an LLC that files as a corporation.

Though the majority of nonemployees and vendors should receive a 1099, there are a few exceptions:

• You don’t need to file 1099s for W9 employees. 
• You don’t need to file for vendors classified as non-profits, government agencies, public utilities, insurance carriers, and foreign entities. 
• You don't need to file for S corporations and C corporations unless they meet the requirements mentioned earlier.  

What type of 1099 does a vendor receive?

There are 17 different kinds of 1099 forms. The ones most relevant to startups are 1099-NEC and 1099-MISC, which we cover below. Some startups may also need to report payments from third parties like PayPal, which is a more complex process and often requires guidance from a professional.

• 1099-NEC is used to report nonemployee compensation to independent contractors, freelancers, sole proprietors, and self-employed individuals. The majority of vendors paid more than $600 during the year will receive this form. Examples of eligible payments include contract payments, as well as fees and service charges paid to nonemployees.

• 1099 MISC is used to report miscellaneous payments that aren’t included on 1099-NEC. Payments must be at least $10 for royalties, and at least $600 for rent, prizes and awards, medical and healthcare payments, and settlement payments to an attorney.

How can startups prepare throughout the year?

The 1099 process can be tedious, but getting organized early and staying on track throughout the year will put you in better shape for tax season.

• Designate a 1099 point of contact or team that oversees the 1099 review and filing process.
• Establish a 1099 process and ensure everyone on the team follows the necessary procedures.
• Obtain W-9’s at the beginning of the vendor relationship.
• Utilize payment systems like Bill.com to store vendor tax ID numbers and W-9 forms.
• Complete a partial-year review of payments to contractors and vendors by the end of September to ensure you have the necessary W9s and tax IDs. If you use a payment system for most of your payments, don’t forget to check for payments made from your bank account. 
• After the initial review, review every month moving forward. Contact contractors and vendors to obtain missing W9s during each review round. That will make the final review and filing in January much easier. 
• And finally, start the 1099 review process early. The end of the year is a busy time with holidays and year-end close so you want to leave yourself plenty of time.

Can you use your payroll provider for 1099s? 

Many payroll providers like Gusto, Justworks, and Rippling file 1099s for contractors that were paid through their platform. But they don’t include outside payments, like those made via wire transfer or payment processors. That’s why it’s important to do your own calculations to be sure you’re reporting the right numbers. 

When are 1099s due?

Key dates are below but it’s best to check IRS.gov for the most up-to-date information and 1099 form instructions. 

• Form 1099-NEC must be sent to vendors and filed with the IRS by January 31, 2024.
• Form 1099-MISC must be sent to vendors by January 31, 2024 and electronically filled with the IRS by April 1, 2024. If filing on paper, the deadline is February 28, 2024.

How Furey can help

Tax season doesn't have to be stressful. At Furey, we understand the importance of maintaining clean and accurate records. Our comprehensive accounting and Accounts Payable (AP) processes help get your business 1099 ready, whether you prefer DIY filing or opt for our 1099 service.

Here's how our exclusive 1099 service, available to all Furey clients, can simplify your filing experience:

• We meticulously review your payments and determine eligible vendors for 1099 reporting.
• Our 1099 Tool seamlessly integrates payments across various channels, automatically generating vendor and payment information.
• Once the 1099s are prepared, we send digital and hard copies to your vendors, and efile with the IRS via Track1099.
• After filing, we continue to monitor and assist in resolving any errors that may come up.

This article is for informational purposes only, and is not intended to provide tax, legal, or accounting advice. You should consult your own tax, legal, or accounting advisors before engaging in any transaction.