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). The process isn’t necessarily fun but it has to be done right and on time. Or you may get stuck with a big fine from the IRS. 

All things considered, filing one 1099 is a lot easier and cheaper than filing payroll taxes and W2s. Still, 1099 forms are complicated, especially if you’re juggling many different nonemployee payments. There are several forms to keep track of (17 to be exact), each with different reporting requirements. And questions are sure to come up. For example, which form goes to your freelancer? Which form do you use to report credit card payments? Can you send vendor forms digitally? What should you do when EIN and vendor names don’t match up? 

In this guide, you’ll learn more about 1099 and what you can do 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?

If your business paid a vendor more than $600 during the year and they fall into the categories below, you will need to file a 1099 for them. Aim to calculate the payment total in January after all payments have been made for the year. 

• Freelancers or independent contractors classified as individuals, sole proprietors, or single-member LLCs should receive a 1099. Examples include consultants, designers, and paid influencers. 
• Partnerships or an LLC that files as a partnership should also receive a 1099. 
• Law firms must receive a 1099 regardless of their tax classification. So even if a law firm is classified as a corporation or an LLC that files as a corporation, a 1099 still must be filed for them.

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 also don’t need to file for vendors classified as non-profits, government agencies, public utilities, insurance carriers, and foreign entities. 
• You do not 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 professionals.  

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 on1099-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. We caught up with our 1099 team at Furey for tips to help your business prepare for 1099s:

• 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. For example: 
• 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, you’ll want to 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. 

How Furey can help

Clean and accurate records are crucial when it comes to a stress-free tax season. At Furey, our robust accounting and AP processes get your business 1099-ready, whether you’re filing on your own or utilizing our 1099 service (available to current clients at this time). We help your business: 

• Review payments and determine eligible vendors 
• Integrate payments across multiple changes using our 1099 Tool, which automatically generates vendor and payment information. 
• Send digital copies and hard copies of 1099s to vendors and efile with the IRS via Track1099.
• Monitor and resolve errors after 1099s have been filed. 

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, 2023. 
• Form 1099-MISC must be sent to vendors by January 31, 2023 and electronically filled with the IRS by March 31, 2023. If filing on paper, the deadline is February 28, 2023.

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.