A better approach to 1099s — have them flow naturally from the process.
“Knowledge is knowing that a tomato is a fruit. Wisdom is knowing not to put it in a fruit salad.” — Brian O’Discroll, rugby player
Most finance team members know the basics of 1099 requirements, and the IRS has issued clear guidelines. But it takes more than knowledge of the regulations to handle 1099 reporting in a way that flows smoothly without causing disruption and a last-minute scramble every January.
Modern finance tools give you a better option: Instead of thinking of 1099 filing obligations as a nuisance to deal with at the very end of each year, make the entire process easier by building it into your expense management system year-round. In doing so you’ll have everything you need when it’s time to send out the forms. Taking a modern approach to all non-payroll spend using a comprehensive spend management system does so much more than streamline 1099s. It also automates approvals, payments, POs, and posts to the GL. It can even help you reduce your 1099 obligations by giving you easier access to shifting payment types from checks or ACH to your corporate card program, via virtual cards.
Understanding 1099 requirements.
If you paid an independent contractor or self-employed individual more than $600 in 2020, you must complete an IRS Form 1099 and send Copy A of the form to the IRS. Copy B must be sent to the vendor. There is one exception to the $600 cut off, which is that any royalties paid over $10 must be reported.
In 2020, the IRS introduced Form 1099-NEC (which stands for non-employee compensation). This form goes to vendors who received a 1099-MISC last year with their payments reported in Box 7 (for non-employee compensation). The majority of 1099s that businesses send out will be Form 1099-NEC. The older form, 1099-MISC, is now used for miscellaneous expenses, such as rent, royalties, or medical and health care payments.
Deadlines are a critical part of the 1099 requirements, and you will be penalized if you miss one. Here are some key dates for reporting of 2020 payments:
February 1, 2021: 1099-NEC due to IRS and vendors. 1099-MISC due to vendors.
March 31, 2021: Deadline for the 1099-MISC to be filed with the IRS.
Penalties for missing deadlines can add up. These are the penalties for businesses with gross receipts of $5 million or less:
- $50 per return for up to 30 days late, to a maximum of $194,500.
- $110 per return for more than 30 days late, but before August 1, to a maximum of $556,500.
- $270 per return after August 1 or not at all, to a maximum of $1,113,000.
- $550 per return for intentional disregard, with no limitation.
Know your obligations.
It’s always best to consult the IRS instructions for any form and to seek advice from a tax attorney when needed, but here are some general instances when you are required to issue a 1099:
- Services over $600 performed by an LLC, LLP, or independent consultant and paid for by check, ACH, or Bill.com: Issue a 1099-NEC.
- Rent over $600: Issue a 1099-MISC.
- Royalties over $10: Issue a 1099-MISC.
- Medical and health payments over $600: Issue a 1099-MISC.
1099s do not need to be issued to C-Corps, with the exception of medical and health payments, gross proceeds paid to attorneys, or substitute payments in lieu of dividends or tax exemptions, all of which require a 1099-MISC.
1099s are also not required for things such as business travel expenses, employee expense reimbursement, office supplies, freight, storage, or rent if the payments are made to real estate agents or property managers.
Approaching 1099 requirements wisely: Make it part of the flow.
To avoid last-minute problems at the end of January, embed a process to meet 1099 requirements at the onset of an expense. A spend management platform that addresses the entire payment process, from initial request to GL sync, will take 1099 requirements into account every time a bill is paid.
As an example, the Airbase spend management system starts the 1099 process the minute the vendor is added to the system. As part of creating a vendor, simply indicate if that vendor fits the criteria for receiving a 1099. If so, you will need to collect their tax information by having them fill out and submit a W-9 form. The W-9 has all of the relevant information you will need for the 1099: name, address, contact information, e-mail address (preferably for the accounting department), and EIN/SSN.
In a spend management platform, a vendor’s contracts, invoices, W-9s, and other documents are attached to the same record, so you have everything you need to manage payments for that vendor in one place.
You can choose to make W-9 submission a requirement for getting paid. In other words, if a vendor hasn’t submitted the form, you won’t pay them. We recommend enabling this feature so you don’t have to chase down the information when it’s 1099 time. As Dan Shinstrom, Director at KongBasileConsulting, joked during Airbase’s Preparing for year-end: 1099s can be fun! webinar, “if you owe a vendor money, they will give their W-9 to you much faster than they will in January or February.”
Having the W-9 on file helps you to meet your IRS reporting obligations, so you must track which vendors have submitted one. If you don’t use a spend management platform like Airbase, make sure you review your W-9s well before the deadline to make sure you have the required information. You also want a reliable way to track which vendors have submitted a W-9, and which vendors are over the $600 threshold. Airbase’s reporting functionality will produce a real-time report showing those vendors.
Shift the reporting burden.
When a vendor is paid by credit card, PayPal, or other types of payment processors, the 1099 obligation moves to the payment processing company. This is one reason why astute finance teams are moving bill payments to their card programs.
With a payment-agnostic spend management platform, such as Airbase, you can make bill payments through your card program and shift the burden of 1099 reporting to the card company.
It’s an easy way to avoid 1099s (as fun as they are…) without any extra work on your part. Plus, as an added bonus, you can earn cashback on card spending. Think of it as monetizing accounts payable.
The wise approach to 1099s is to embed the process into a complete bill payment system, which means when it’s time to report to the IRS and to the vendor, all of the information will be at your fingertips — who, how much, tax ID, address. To learn more about how a spend management system can help, talk to Airbase. Because knowing you have to do 1099s, and having the wisdom to do them without making them into a fruit salad, well... that’s how great companies are built.
Airbase offers a one platform solution to manage all non-payroll spend. It provides oversight and control over spending with real-time reporting and automatic syncing directly to your general ledger. Control all payments – physical cards, virtual cards, ACH, and checks – from one place. Close faster. Empower employees. Control spend.