It may be June, but it is never too soon to prepare for January, specifically your 1099s!
As a reminder, 1099s are used to record income. The most commonly used forms are the 1099 NEC (Nonemployee Compensation), in which businesses report payment over $600 given to nonemployees, such as an independent contractor or attorney, and the 1099 MISC, which is commonly used for landlords, prizes, and various cash awards. However, there are several types of less common 1099s that exist and can be found on the IRS website or explained by your bookkeeping professional.
Here are some helpful tips to make January less stressful:
- Collect a W-9 from every independent contractor being paid for a service BEFORE you pay them the first time. Even if the check is under $600, you don’t know if you will be using them again later in the year. It is much easier to get the W-9 information before the first payment is made.
- Based on the W-9, note in your accounting software if this contractor is eligible for a 1099. A general rule-of-thumb is a Sole Proprietor is eligible, and an LLC taxed as S-Corp or C-Corp is NOT eligible. However, when in doubt, always collect the W-9 and store them in one location in case you need to go back and look.
- Annually, ask your regular vendors to confirm their address on file. 1099s must be mailed to the recipient, so you need a current address. It is also good to check if they changed their business structure or their 1099 eligibility. You may also consider hiring new vendors each year.
- Minimize the accounts that are used for payments to contractors for services. Most services fall into categories such as: Contractors, Repairs & Maintenance, Temp-Workers, Legal Services, Rent. It is much easier to set-up your accounting software (or run your own reports) if non-employee payments for services are separate from payments for products or utilities.
- Clearly identify in the description or by separate checks what is payment for services and what is a reimbursement. For example, if you reimburse a temp-worker for job materials they purchase on your behalf, make sure that you separate the payment for labor from the reimbursement. Categorize the separate payments differently in your software. The 1099 that is issued in January should only include the payment for labor. You don’t want to manually have to separate the amounts for every contractor in January. Separate them when the check is being written and entered into your accounting software.
- Include the vendor’s name on every transaction when you enter the information into your accounting software. This ensures you can look under the vendor’s name and see every payment you made to them during the year. That includes any gifts you gave them.
- Complete your December bookkeeping as quickly as possible in January. By completing all categorization and reconciliations of checking and credit card accounts, you can be certain that you have captured all the transactions for the year. You don’t want to have to issue Amended 1099s later.
Following these helpful hints won’t make preparing 1099s any more fun, but the process won’t be as much of a headache. ADKF is here to assist you as you prepare your own 1099s or we can complete the process and e-file for you.