Are you sending out 1099 forms soon to the contractors you worked with this year? If so, you should know that the IRS moved up the deadline to send out 1099s by a significant amount of time; all must be mailed by January 31st, 2017. If you’re late, you could face severe fines from the IRS for each late form, therefore it’s imperative to have your financials in tiptop shape. For purposes of this post, we will only be discussing Box 3 of 1099’s, or non-employee compensation.
Before we dig in, let’s make sure you have properly categorized your vendors as 1099s. According to the IRS, if you outsource services that you do not have control over how the work is performed, how the person is paid (and you aren’t paying their employer portion of taxes such as FUTA, Medicare, SS, etc.), or when the work is completed, they’re likely a 1099 contractor. Please keep in mind that 1099s definitely are not black and white, so we recommend you judge each vendor relationship on a standalone basis to determine the correct categorization. You must also have a completed W9 for all contractors utilized during the year. Get this out of the way before anyone begins work or payment is initiated. While a contractor email address is helpful (for e-filing), a fully completed W9 is step 1 and is enough to send out a 1099. Step two? Reconciled financials.
Why do I need to do this now?
Since the IRS moved up the Box 3 filing date to be postmarked by January 31, 2017, this puts the pressure on you to use any time you have left in 2016 to get your final financials in order. Reach out to vendors and get whatever you may be missing from their W9 (some contractors may feel more comfortable calling in their SSN rather than writing it down). Be sure to consolidate any information you may have in your accounting software, your dropbox account, or that stack of papers that’s been collecting on your desk all year.
Why will reconciled financials help me deal with my 1099s?
>Reconciled financials makes it easier to know which contractors you’ll need to send 1099 forms. It’s important to note that you only need to send 1099s to contractors who you paid $600 or more in nonemployee compensation. This non-employee compensation excludes things like expense reimbursements for travel, supplies, etc. You wouldn’t want your contractor to get taxed for money that is simply a reimbursement! Accounting software like QuickBooks Online and Xero often make it simple to track who is and is not a contractor, so come year-end you can easily pull and reconcile reports for anyone.
What if my financials aren’t reconciled?
Neglecting to send your 1099s on time can end up costing you a lot of money in fines, but it’s also inconsiderate to your contractors because they need this form to file their individual taxes. If you know that you will not be able to fill out your 1099s on time, you have the option to file a 30 day extension.
The IRS created the 1099 form to make it more difficult to commit tax evasion, which is precisely why it’s so serious that filling must be done in a timely and accurate manner. All forms must be flawless and match what the IRS has in its database and what your contractor has filed, otherwise it can spark an immediate red flag. Keep your books clean so if an issue arises, it’s easier to prove that you have not made a mistake, or at least on purpose.
The start of a new year is “busy season” for tax and accounting professionals, but it doesn’t have to be for you. Work with a bookkeeper every month to reconcile your financials and ensure all vendors have a completed W9 on file, setting you up for a smooth 1099 and tax filing process. You’ll be happy to get this off your list of things to do and your tax accountant will be thrilled that you’re on top of it.