There are over 32 Million Self-Employed individuals in the US which presents a huge need for proper 1099 management among payroll service bureaus across the country.
Overview of the 1099
IRS Form 1099 reports to the Federal government various types of taxable income paid to contractors and vendors. There are versions of the 1099 to report payments for services as well as interest, dividends, and real estate sale proceeds. The form is issued by companies to freelance workers, contractors and vendors including medical care providers and attorneys (even if they are incorporated) who provide services in excess of $600. Companies generally don’t withhold taxes from the payments to these workers. To ensure that companies and workers properly report earnings, the IRS has added questions to corporate, partnership and individual tax forms in recent years to identify taxpayers who should be filing forms 1099. For-profit and nonprofit organizations must file 1099s, as well as sole proprietorships, partnerships and corporations. To ensure that a company is in compliance as an employer, a best practice is to require all vendors to complete a W9 upon engagement or before they are able to receive payment.
What Happens if You Don’t File Correctly?
So what happens to companies or employers that don’t comply with the 1099 filing requirements? There are different types of penalties for failure to file 1099 with the IRS, intentionally filing incorrectly and failure to provide copies of 1099s to recipients. The penalty types are not mutually exclusive, which means that if you fail to file 1099s with both the IRS and the recipient, the penalties could be double the standard penalty rates.
The penalty for failure to file, which ranges from $30 to $100 per form, with a maximum penalty of $1.5 million per year. This is a big increase from the previous maximum penalty of $75,000 to $250,000 per year. The penalty for intentional failure to file or intentionally filing incorrect information is $250 per form with no maximum.
Best Practices for Companies with 1099 Individuals
Establish an automated process for executing contracts with and obtaining Form W-9 from all vendors, contractors and service providers to make the reporting process more efficient. This will ensure you have the correct information for preparing a 1099 and will protect you against the requirement to withhold income tax from vendors who do not provide this information to your organization. Maintaining documentation that supports your worker classification will help if you are ever get audited.
Require a W-9 for every vendor
Stay current on all IRS changes
Automate/Outsource your W-9/1099 Process
Having an automated process in place is the most efficient method of managing the W-9 and 1099 requirements.
For more information of how to automate these processes please visit the following links:
Or contact the Payroll Services Manager at Avalara for more info:
Manager Payroll Services Channel