How to Prepare for 1099 Processing: A Guide for Small Businesses
Disclaimer: The information provided in this blog is for general informational purposes only and is not intended as legal advice. Solomon Accounting Group is not a law firm, and our team does not offer legal services or legal advice. For advice regarding your specific circumstances, we recommend consulting a qualified attorney or legal professional.
As the end of the year approaches, preparing to issue 1099 forms becomes an essential task for small business owners. The IRS requires businesses to report certain payments made to non-employees, like independent contractors, which ensures that income is properly documented and taxed. Knowing who to send a 1099 to, how to gather the necessary information, and how to use QuickBooks Online for these tasks can simplify the process and keep your business compliant. In this guide, we’ll walk through what a 1099 is, who needs to send and receive one, and how QuickBooks Online can make 1099 processing easier for your business. While there are a plethora of different types of 1099s that can be sent, in this article we’ll focus on the most common 1099, the 1099-NEC.
Who Needs to Send 1099s?
Any business that has paid $600 or more to a non-employee for services throughout the year is generally required to send a 1099-NEC form to those individuals or entities. While there are some exceptions, this holds true for the vast majority of companies. This requirement applies to all business types, including sole proprietorships, partnerships, LLCs, and corporations, if they paid an independent contractor or vendor. The purpose of the 1099-NEC is to document non-employee compensation, which the IRS monitors to ensure that income is reported and taxed appropriately.
It’s important to note that this requirement is specifically for services, not goods. For example, if you hired a graphic designer, consultant, or web developer and paid them over $600 in the year, you’d likely need to send them a 1099-NEC. However, if you bought $600 in supplies from a retail store, you wouldn’t need to issue a 1099. Businesses that fail to send 1099s when required may face penalties from the IRS, making it crucial to understand and comply with this rule. 1099s must be submitted to the IRS and sent to eligible vendors before January 31 of the following year.
Who Receives a 1099?
The 1099 form is generally issued to independent contractors, freelancers, and non-employee service providers who have been paid $600 or more during the year for their work. This includes individuals or unincorporated businesses such as sole proprietors, partnerships, and LLCs that are not classified as corporations. Keep in mind, any reimbursement payments to a vendor should not be included on a 1099, as that is not income to the vendor, only a repayment of their own money. Common examples of 1099 recipients include consultants, graphic designers, freelance writers, and other contractors who provide services to the business.
While most corporations are exempt from receiving a 1099, there are exceptions. Payments to attorneys and law firms require a 1099-NEC, even if they are incorporated, provided the payments exceed $600. It’s important to review all vendors and contractors each year to ensure you’re correctly identifying those who qualify. This helps keep your records accurate and ensures you stay compliant with IRS requirements.
We highly recommend you read the IRS rules and regulations on 1099s so you know all the intricacies of 1099s, which can be found here. If you are worried about running afoul of the IRS rules you can contact Solomon Accounting Group and we will be more than happy to answer any questions you may have.
Using QuickBooks Online to Identify 1099-Eligible Vendors
QuickBooks Online makes it easy to identify which vendors qualify for a 1099 by providing tools to track payments and mark vendors as 1099-eligible. Start by accessing the "Expenses" or "Vendors" section in QuickBooks, where you can review all vendor profiles and ensure that contractors are set up as eligible for 1099s. When you add a new contractor or vendor, you can mark them as a 1099 vendor, which allows QuickBooks to track their payments throughout the year.
To determine which vendors need a 1099, run a "1099 Transaction Detail" report within QuickBooks Online. There are several other 1099 reports you can also use to verify the correct vendors are marked as 1099-eligible, and that the amounts paid to the vendors are correct. This report will display total payments to each vendor, making it easy to confirm which contractors meet the $600 threshold for non-employee compensation. Reviewing this report at year-end simplifies the process of confirming 1099 eligibility and ensures you have the correct amounts ready to report.
Sending 1099s Through QuickBooks Online
Sending 1099s through QuickBooks Online is a straightforward process that saves time and reduces errors. Once you’ve identified your 1099-eligible vendors and confirmed the amounts, go to the “Payroll”, then “Contractors” menu, and select “prepare 1099s”. QuickBooks Online guides you through each step, starting with reviewing your vendor list and payment details to ensure accuracy.
After verifying the information, QuickBooks offers an e-filing option, allowing you to submit your 1099 forms directly to the IRS and distribute copies to your contractors. This e-filing service also provides tracking, so you can confirm that forms are submitted on time and monitor their delivery. Processing 1099s through QuickBooks may incur a small fee, depending on your QuickBooks plan. Using QuickBooks Online for 1099 filing helps you streamline compliance and reduces the risk of penalties for late or incorrect filings.
Watch this Quickbooks Online 1099 Filing tutorial to learn more.
Tips for Easy and Quick 1099 Processing
To make 1099 processing as smooth as possible, it’s essential to gather accurate information from the start and follow consistent procedures throughout the year. One key tip is to never send a payment to a new vendor without first obtaining a W-9 form. A W-9 collects essential information, including the vendor’s tax identification number (TIN) or social security number (SSN) and business structure, which you’ll need to prepare the 1099. This is standard business practice, and every vendor should be willing and able to provide a W-9 upon request.
Here are additional tips to simplify 1099 processing:
Set up and label 1099 vendors in QuickBooks from the beginning: When you add a new vendor, mark them as 1099-eligible if they’ll be performing a service for your business and their business structure is set up to require a 1099. This allows QuickBooks to automatically track payments and generate accurate 1099 reports.
Review vendor payments periodically: Checking payments throughout the year helps ensure that you’re on track with 1099 requirements and minimizes last-minute surprises at tax time.
Keep digital copies of all W-9s: Store completed W-9 forms securely within QuickBooks or in another digital file system. Having them readily accessible simplifies verification during 1099 preparation and ensures compliance with IRS recordkeeping requirements.
Utilize QuickBooks’ 1099 tracking reports: Run 1099 reports in QuickBooks quarterly to stay organized and avoid end-of-year rushes. These reports give you a clear view of vendor payments and simplify eligibility verification.
Conclusion
Preparing 1099s doesn’t have to be a daunting task if you stay organized and use the right tools. By understanding who needs to receive a 1099, keeping vendor information up-to-date, and leveraging QuickBooks Online, you can simplify the process and stay compliant with IRS requirements. Taking the time to set up a consistent system from the start will make 1099 processing easier and reduce stress during tax season. If you’re looking for expert support or want help setting up a streamlined 1099 process, Solomon Accounting Group is here to assist with every step to ensure your business’s compliance and peace of mind.
