Sorry, Your Understanding of 1099s is Probably Wrong…

It's that special time again—tax season! And let's face it, the world of 1099s remains a maze of confusion for many, including business owners, everyday folks, and yes, even some tax professionals.?

That's why I’m bringing back a fan favorite from our newsletter archive to shed some light on this tricky topic.

Did you get a 1099-NEC in the mail recently??

Probably right before you filed your tax return or it’s currently sitting in the stack of ‘at some point I’ll do my tax return’ stuff.?

Did you start a business last year? And yes, doing something on the side where you earned money, sold items on eBay, did deliveries, etc. counts as running a business.?

If you did either of the above things, then you probably also have a requirement to send 1099s as well.?

YES, as a business owner, you potentially receive AND send 1099s.

Let me start with….1099s are a big deal.?

I can hear some of you experienced business owners saying, “I haven’t done them before, why are you telling me to do them now?” Frankly, because even though the 1099 rules have been around for a long time, there is something new.

What is new? The IRS now has the technology to actually enforce these ‘old’ rules.

Sending 1099s

I’m starting out by mentioning SENDING 1099s because, from prior experience, taxpayers assume this doesn’t apply to them and are only interested in what they should do if they RECEIVE 1099s.?

So….I’m making those people still read about sending 1099s before getting to the section on receiving 1099s. I’m betting more than a few people will read this section and think, “Oops, this does fit my facts, I maybe should be sending 1099s too”.

So why is the sending/not sending of 1099s a big deal??

Because the penalties for missing the filing deadline for sending 1099s range from $60 - $310 PER FORM.?

If your business was required to send 20 1099s but none were sent, YES you could pay a $6,200 penalty (note, the current maximum penalty is over $3M depending on what is missing/wrong/not filed, etc.)

So, what should you do?

1. Figure out if your business (and again, YES, if you’re earning money outside of a regular W-2 job (where you’re an employee) you are probably running a business) needs (needed) to issue 1099s, and if so, do so, even if late!

2. Determine when to send a 1099. It’s trickier than it sounds:

Here’s the bottom line – contrary to popular opinion, YOU GENERALLY HAVE NO IDEA IF YOU NEED TO SEND SOMEONE A 1099 at the time you’re paying them.

• If I paid someone less than $600 I don’t have to send them one – right? Not necessarily
• I didn’t have any contractors, so I don’t have to issue any 1099s – right? Not necessarily
• The person said they’re a Corporation and therefore don’t need a 1099, so I’m good. Ummmm, no.
• There are multiple pieces of data one needs to determine if a 1099 should be issued.
• There are multiple types of 1099s depending on what the payment is for (i.e. interest, dividends, payment for services, etc.)

3. Here’s what every business owner hates to hear…..BEFORE you pay ANYONE, they are required to give you a properly completed Form W-9.

• But I’m only paying them $250, that’s not over the $600 threshold. FALSE – GET A W-9. How do you know how much you’ll be paying them for the full year? Some types of companies/industries don’t have a $600 threshold, some, if you pay them $10 they get a 1099.

• They are the lawn guy, not my contractor doing work for me, I only need to worry about contractors. FALSE – GET A W-9.?

The rule is EVERYONE/EVERY ENTITY a business pays should receive a 1099 UNLESS there’s an exception. The title that you call the person you’re paying (contractor, consultant, vendor, etc) is irrelevant, it’s an outgoing payment, and that’s what matters.

What are the exceptions? Do you know them all? What happens when the rules change? Etc.

So the point is….ALWAYS get a properly completed W-9 before paying.

• Many factors go into whether or not a 1099 needs to be issued, one of those factors is the type of tax reporting entity the recipient is.

The W-9 is what tells you what type of tax reporting entity the recipient is.

And yes, there are rules and instructions on a properly completed W-9. You, as the business owner, need to be aware of these rules.

The most common mistake is related to Single Member LLCs (to be discussed in a later newsletter – because taxpayers hate the correct answer, so they spend tons of time and energy trying to argue that the rule isn’t right/fair.)

• Bottom line – Because the IRS rules still have some gray and interpretation involved, and the IRS isn’t going to take your word for it (or an email from a person/business you paid) stating that they don’t require a 1099……

The default is to ALWAYS get a properly completed W-9 before paying a person/business.

Yes ANY outgoing payment (unless it’s a publicly traded company or supplies ) a business should get a W-9 from that vendor.

→ Yes, the lawn company

→ Yes, the cleaners who take care of the office

→ Yes, the repair guy who fixed the office copy machine

→ Yes, the payroll company

→ Yes, the company you pay monthly rent to

→ etc.

Once you have a properly completed W-9, file it away. Then in January of the next year you (or your accountant) can go through the rest of the decision tree to determine if a 1099 needs to be issued.

There are several other criteria that may/may not indicate a 1099 is necessary – but step 1 is reviewing that vendor's W-9.

• And…yes, a W-9 needs to be accurate and completed correctly.

The challenge with most things tax/IRS related is that there isn’t an immediate red flag when something isn’t right.

The IRS accepting a document/return/form doesn’t mean that it’s correct. It just means ‘it was received’. No person or computer has actually checked it yet.

So yes, a year later companies will receive a notice, stating that the 1099 they issued was incorrect – the vendor name and EIN (or SSN) of that vendor didn’t match.

I hate to say it, but prior to a few years ago, it almost didn’t matter how people completed W-9s, if 1099s were all issued, etc. Well….. times change.?

This bears repeating, for all those taxpayer’s saying “I’ve never gotten a notice about an EIN or SSN not matching.” That’s because the IRS didn’t have the technology to check. Now they do.

Remember when you used to be able to float a check for a few days? Well, times change.

Remember when not doing 1099s or not being diligent about making sure they are correct and accurate wasn’t really a big deal? Well, times change.

• What if the vendor refuses to give me a W-9?

Unfortunately, I don’t have a good answer for this (and neither does the IRS).

?Per §6109 of the Internal Revenue Code (§6109(a)(2),(3) and Treasury Reg §301.6109-1(b)(1) anyone a business pays is required to provide it.

From the IRS’s perspective, you shouldn’t do business with someone who doesn’t want to follow the law.

And the reality is, it’s only small businesses that have this problem. A person who wants to work with a large corporation absolutely completes a W-9 correctly, accurately, and timely. Large companies DO NOT find ways around these rules, it’s part of the onboarding paperwork before any vendor is paid.

Pragmatically, it is possible to ask for a waiver of the penalties if a business can prove they did everything possible to request the form. But even if granted, it’s still just a one-time abatement and doesn’t apply to future years if you’re continuing to do business with someone who doesn’t want to follow the law.

In “Plain English” - YES, if you’re ever under audit, the IRS looks at all outgoing payments in your books. And then they ask to see the W-9 from that Vendor/Contractor/Person and either the 1099 to that Vendor or proof of an exception.

Remember – businesses are subject to the rules for issuing 1099 rules, not individuals.?

HOWEVER, basically a business is when a person is earning income outside of a W-2.?

Your neighbor who buys surplus from XYZ Warehouse and sells it on Facebook Marketplace is a business owner, and yes is subject to the 1099 rules.?

No, it doesn’t matter if they formed a business entity or not. And it doesn’t matter if they made a profit or not. These are urban myths about who needs to issue 1099s.?

What matters is, that you’re doing something to earn income and hopefully make a profit – that means you’re running a business (can be registered with the state as a business or not).?

If you are preparing your tax return and are trying to deduct business expenses, then also realize you’re subject to the 1099 rules.

Recall my last newsletter where I wrote about people who wanted the benefits of a business (i.e. write-offs of expenses) but didn’t want the obligations of a business. You can’t have it both ways ??

RECEIVING 1099’s

Recipients of 1099s: Okay, here’s where most of you are thinking ‘Yes, this applies to me!’

1) Do you need to report all the 1099s received as income? BASICALLY, YES.

2) Most taxpayers want 3 things:

a. Pay the least amount of tax that’s required

b. File an accurate tax return

c. Avoid getting IRS notices

3) Because all 3 of these things are equally important:

a. Be sure all 1099s in your name/business name are reported on your tax return in the proper place. This helps avoid getting IRS notices.

b. The IRS gets copies of all 1099s issued and matches what was reported to them to your tax return. So be sure 1099 income isn’t missing from your filed return.

c. A tax return missing 1099 income can incur penalties and interest because all of the income isn’t reported, the IRS will add it to your return and increase your liability.

4) But what if it’s wrong? In an ideal world, you could ask the company sending you a 1099 to send you a corrected one. And the IRS rules state that companies should issue corrected 1099s. But in the real world, this rarely happens. There are ways to adjust your return to not count this income (if it truly shouldn’t be income) but because of the IRS matching programs – when filing your tax return step #1 is Always Report All 1099 Income.

a. Why? Because…

i. The company sending them is afraid of running afoul of the 1099 rules (see the first ? of this newsletter) and A LOT of companies don’t want to risk going through their decision tree wrong. Therefore, some companies issue 1099s to everyone/every company they’ve paid that year.

ii. It saves time and money, just sending one to every vendor that was paid that year is quicker and easier than having to do an analysis.

iii. Why risk a penalty for not sending one? There’s no penalty for sending a 1099 when one isn’t required, it’s just a penalty for not sending one if one was required.

b. So….as a business owner what about filing an accurate return?

iv. Working with your tax professional, you can still file an accurate return even if you have to report incorrect 1099 income.

v. Also, understanding what’s included on the 1099 helps file an accurate return. Some 1099s have reimbursed expenses, some don’t. Do you know which is the case for you?

So…business owners (recall my definition of a business owner, yes, your ‘side-gig’ is a business) potentially receive and send 1099s (and there are different types of 1099s!). This also means that as a business owner, you both send and receive W-9s. A business sends a W-9 to everyone who pays them, and you request/receive W-9s from everyone whom you pay (rather, before they’re paid).

In case it isn’t obvious yet, just asking a business owner about 1099s leads to many matters of confusion!

Phew, trying to be ‘accurate’ without reprinting the entire IRS manuals and regs is a challenge. And of course, the above isn’t specific tax advice you must follow, instead – be sure to talk to your professional to appropriately apply the above to your financial tax pattern. But hopefully, you’ve found this information helpful.

If your organization is looking to understand how the tax code impacts them, I’m here for you.

When I speak to new business owners, I teach them strategies for tax planning then they can feel more comfortable making informed decisions. When I speak to new executives, I teach them ‘why’s’ of alternative compensation so they feel more comfortable making an employment decision. And when I speak to taxpayers in their prime earning years, I teach them the strategies available to them regarding the alphabet soup of the tax code to accomplish those incremental base hits that help over the long-term.

If you're interested in learning more about how your team or organization can benefit from understanding how the tax code impacts them, don't hesitate to reach out.

Book a free call with me, and let’s strategize making your next event meaningful.

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About Cecily Welch

Cecily Welch demystifies complex financial issues so people can make informed decisions and turn goals into financial action. She began her career as a national and international auditor. Cecily has continued to provide client focused accounting and financial expertise for both large and small CPA firms. Cecily is adept at helping people understand how their financial decisions help them meet their life goals. And because no financial decision should be made in isolation, she is dedicated to educating others on the impacts of tax policy as an advocate for taxpayers, earning her the moniker as ""The Accountant I Can Understand?”.

She's been published in the Wall Street Journal, 3-time guest on Georgia Public Radio/NPR on Second Thought with Celeste Headlee, and created a 3 series webinar on business financials for Cobb County, GA.

In addition to being a licensed CPA in both Illinois and Georgia, Cecily has more than 30 years experience as a certified financial planner (CFP?) and a public accountant. She earned her Bachelor of Accounting from North Carolina A & T State University and MBA from the University of Wisconsin-Madison. She is an active member of several non-profits and professional associations, including:

• City of Atlanta, Governing Board of the Inspector General (formally the Board of Ethics and Independent Compliance)
• AICPA IRS Advocacy & Relations Committee, Appointed
• Georgia Society of Certified Public Accountants (GSCPA), Leadership Council, Tax Task Force - Former Chair, Former Board Member
• Internal Revenue Service Advisory Council (IRSAC) - Three year appointment (2011-2013) Sub-Chair Small Business and Self Employed