The January 31st deadline for vendors and the IRS to receive a copy of Form 1099 is fast approaching. Many organizations tend to perform a 1099 analysis after the tax year ends. This gives organizations only a month to perform the 1099 analysis, gather correct information, and send to the IRS. In 2019, I noticed an uptick in IRS letters; notice CP-2100A, which requires the organization to withhold taxes for 1099s, due to not reporting or incorrectly reporting social security numbers or tax identification numbers (TINs). Gathering information from 1099 vendors can be time consuming and frustrating. Sometimes vendors provide erroneous TINs. Organizations are liable for any taxes that were supposed to be deducted and withheld. This makes 1099 planning even more necessary than ever.
What can organizations do to prevent errors in completing form 1099? Here are five recommended steps to prepare for a better managed 1099 experience:
Determine whether the independent contractor is truly an independent contractor or an employee. In California, the ABC test which is used to determine whether a worker is an independent contractor was codified into law; New York may be following California’s lead in 2020.
Provide a contract to the independent contractor. In NYC, the Freelancers Act requires any services over $800 to be written in a contract with the responsibilities or deliverables outlined, the duration, when payment will be made, and how much they will be compensated. NYC.gov provides a template - see the Freelancers Act FAQ's for exceptions to this law and a link to the model contract.
Make sure that you gather correct business or personal information when sending out the contract to the independent contractor. Have the contractor complete a W-9 or a W-8BEN (for foreign contractors). If you decide to pay them without getting a W-9 or a W-8BEN, the organization may be responsible for withholding 24% of the payment, as per IRS section 3406(a).
Sync the 1099 data to your accounting system. Work with your accounting team to have the business information or personal information, including TIN, entered into the accounting system or system used to pay the independent contractors. This step will help the accountants with the year-end 1099 analysis by reducing time spent reaching out to vendors or office personnel for W-9s or W-8BEN. Additionally, it will make the 1099 reporting flow more smoothly.
Determine which independent contractor may need a scheduled call or email to verify an address during the tax year. For example, a corporation is less likely to move around than a graphic artist. You can include an address verification with a payment or have the individual submit an invoice with address, TIN, phone, and email.
Following the above steps will enable you and your team to have a better 1099 experience and minimize IRS letters and Department of Labor audits.