The IRS form 1099 is an informational return used to report payments made to individuals or Partnerships for interest, services, bonuses, and other types of income paid to them during the year. Business owners must file 1099 forms with the IRS and send a copy to the individual each year by January 31st.
Here are some examples:
- If you paid more than $600 to a freelance website designer you must file Form 1099-MISC
- If you have convertible notes payable that accrue interest during the year you must file Form 1099-INT
- If you paid dividends to inventors you must file Form 1099-DIV
- If you forgave an outstanding debt during the year you must file form 1099-C
- All amounts paid to law firms must be reported on a 1099 regardless if the law firm is categorized as a corporation and even if the amounts are less than $600
Accounting Best Practices for 1099s
Good recordkeeping is key to fulfilling this requirement and meeting the January 31st deadline:
- Payments to vendors should be categorized in your books and records by vendor and not simply by category or expense line item.
- Small businesses should always request a form W9 from any vendor they do business with. A form W9 will tell you if the vendor is a Corporation (excluded from 1099 requirement) and what their federal tax ID number is (needed for the 1099).
Common Mistakes to Avoid
The following are some examples of mistakes commonly made by small business owners when it comes to 1099 rules:
- Classifying employees as a 1099 vendor when they meet the IRS definition of a W2 full-time employee.
- Giving expensive gifts or prizes to sales representatives or others without issuing a 1099 for the value of the gift.
- Not filing a 1099 for interest accrued on convertible notes or other bonds.
- Not keeping good records or requiring a W9 so when it comes time to prepare the 1099s they are filed late due to trying to collect all the necessary data from each vendor.
What You Should Do Now
Do not wait until the last minute. Reduce the January time crunch by reviewing your vendor list with your accountant in December. Find and address issues early and make sure you have a plan to get the 1099s filed by the January 31st deadline.
We Can Help
If you need help preparing the data necessary to complete your 1099s, contact us today.
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