By: Andrew Smith-Mui, CPA
If the only certainties in life are death and taxes, then why is tax preparation such a hassle? Shouldn’t this certainty eliminate many of the frustrations associated with preparing a tax return? Unfortunately, it has not. The conclusion of another year frantically assembling the information required for IRS form 1099 illuminates a deeper truth: this hassle might not be entirely necessary. Better organization and record-keeping can make this experience go more smoothly.
A first step in preparing 1099s is determining which vendors need 1099s. The IRS provides guidelines in the “Instructions for Form 1099-MISC” pdf on the IRS website on the types of vendors requiring a 1099. Referencing W-9 vendors from the prior year is also a good starting point for determining who needs to be sent a W-9 for the current year. While W-9 forms need not be sent to vendors every year, they should always be sent to any new vendors, and all returned W-9s from previous years should be kept on file. It is not uncommon for vendors to change addresses during the year, and in some cases, a vendor’s remittance address is not the same as its office address. Therefore, having W-9s for the current year ensures vendor addresses are up to date. As a general rule, before an invoice is processed for a new vendor, a completed W-9 should be retained. This way, the vendor’s tax identification number and address can be added to the accounting system, and there is one less vendor to track down in January.
No 1099 form is complete without an accurate payment dollar amount. Accounting systems such as Great Plains and Quickbooks offer features to tabulate the payments to vendors requiring a 1099. Consequently, it is good practice to:
Designate a vendor as a “1099 vendor” as soon as each 1099 vendor is added. This “rolling basis” decreases time spent manually calculating 1099 amounts for an entire year.
Isolate payment for services from payment for business expense reimbursements for each invoice over the course of the year. This means that for some payables the 1099 amount will be less than the total amount of the disbursement.
Comb through a vendor’s invoices for the year and compare the total payment for services to the 1099 amount reported by the software. This is an excellent way to confirm the accuracy of the 1099-eligible amount for each 1099 vendor.
Keeping information in the accounting software updated in this way ensures vendor 1099 data is accurate and minimizes last-minute work. Despite these efforts, there still might be 1099 vendors programmed into the accounting software that have yet to return a W-9. Unfortunately, obtaining W-9s from these remaining 1099 vendors is not as easy a process as it sounds. Some vendors can take weeks to return the completed W-9; others simply do not respond. Withholding payment from a vendor until the W-9 has been received can elicit an immediate reply, but in some cases following up by email or phone still may be necessary.
However, if following up is required for more than a handful of these particularly wily vendors, monitoring their status can be difficult. As a last resort, creating a spreadsheet with all outstanding 1099 vendors is one way to make sure none of their information slips through the cracks. For each 1099 vendor, fields for vendor name, vendor contact information, tax classification, and tax identification number can indicate vendor information that has already been received or is still outstanding. Additional fields can indicate whether the vendor has been sent a W-9 or has been followed up with.
Ultimately, preparing 1099s and maintaining an accurate database will never be stress free. However, much of that stress can be reduced by adhering to a few organizational practices and guidelines during the year and at the year-end preparation period. Then, instead of worrying just about 1099s, we may now have a little more time to worry about Franklin’s first certainty.
Andrew Smith-Mui is a staff accountant in the Firm’s Outsourced Services department and can be reached at firstname.lastname@example.org.