What Are 1099s, and What Are They For?

Dec 16

Read to learn the who’s and what’s and all things Form 1099. Deadline to get those done is January 31, 2021!

ALL THE BUSINESS YEAR-END STUFF

It’s honestly unbelievable, but y’all, we’re closing out another year. What???

On the upside: Holidays! Time off! Celebrations (though maybe virtual?) with family and friends! A fresh start! So many good things.

But also: Business year-end. End of a tax year. Inventory. Deadlines approaching. Yikes.

But, wait, not so fast.

Before we juxtapose those lists as good vs. bad, fun vs. anxiety-inducing, let’s remember that none of this behind-the-scenes business-y stuff is too big or too much for you. Not when you’re equipped with the right know-how and the right tools. You’ve totally got this.

Business year-end stuff may not be as fun as holiday movie marathons, but you’ll get through it just fine if you break down the list of stuff to do into manageable chunks, educate yourself about the requirements and nuances of each piece of the puzzle, and then complete each task with time-saving tools.

That’s what we’re here to do today.

Today, we’ll break off one manageable chunk of the business year-end pie, explore all the ins and outs of doing it correctly, and then get it done.

What piece will that be?

Form 1099.

WHAT IS A 1099?

What even, right? If you’ve ever caught yourself shaking your fist at the proverbial ‘man’, demanding to know why ‘they’ couldn’t have given tax forms names that actually describe what they are, I’m right there with you.

Tax stuff can be stupid confusing.

But don’t worry; I’ve got the answers you need.

So what are Forms 1099, and what are they for?

Think about this way: If ever, before taking your leap into entrepreneurship, you were employed in the traditional sense, you would have received Form W-2 at the end of each year.

WHAT IS A W-2?

Form W-2 is a tax form that reports the wages of individuals on companies’ payrolls.

Companies submit these forms both to their employees as well as directly to the IRS. The IRS then deducts the tax amount withheld from the employee’s pay, reported on their Form W-2, from their tax cycle obligation.

Got it, we’ve all done this before.

And now, as a business owner, you may even be distributing Forms W-2 to your own payroll employees.

DIFFERENCE BETWEEN W-2S AND 1099S

But what about the individuals who you technically “employed” this year, but who are not on your payroll?

These are individuals who are self-employed, who are paid directly by their client base, who use their own equipment and office space to do their work, and who aren’t provided with benefits by the businesses they serve. They’re called independent contractors.

You’re liable for the same tax reporting where they’re concerned, just like your payroll employees. You’ll just use a different form. And that’s Form 1099.

So think of Form 1099 as ‘Form W-2 for independent contractors’.

Forms 1099 and Forms W-2 serve essentially the same purpose: reporting employee income generated and taxes withheld. The difference is just the form recipient’s relationship to your business, a main discrepancy between the two being that you’re not required to withhold taxes on behalf of independent contractors.

HOW DO YOU KNOW IF YOU HAVE TO SUBMIT A 1099 FOR AN INDEPENDENT CONTRACTOR?

But here’s where it does get a teeny bit tricky and bookkeeping-adjacent.

There are certain instances where independent contractors actually won’t require the submission of Form 1099.

So how do you know who needs one and who doesn’t?

Well, first, you’ll only need to distribute Forms 1099 to those independent contractors to whom you paid $600 or more within the past year.

This is obviously where your bookkeeping system becomes extremely important.

I, personally, use Quickbooks for all of my own business bookkeeping, and I recommend Quickbooks software to all of my clients. It’s one of those ‘time-saving tools’ that will save you so much headache over the long run.

If you’re already using Quickbooks, guess what: From inside your account, you can literally click a box on your list of vendors categorized as independent contractors, and the software will run a report on all of your corresponding recorded expenses since the last tax year. That report will tell you exactly how much you paid to each of those independent contractors. Easy as pie!

From there, you’ll only need to distribute Forms 1099 to those independent contractors who supplied you with a service.

AKA, this won’t apply to your purchases of things like office supplies.

So, obviously, you’ll need to know what you actually purchased from each independent contractor. This is another instance where your bookkeeping system comes in handy. As you make purchases throughout the year, you should be recording within your system exactly what you purchased.

That might, at first, sound like a lot of work, but it’s really not. With Quickbooks, after completing the simple set-up process for categorizing your income and expenses, the software will know how to identify and record charges to your business card or account. You can read all about that by clicking HERE.

But, pause for a second... How exactly do you know if you’ve paid for a product or a service?

It sounds super simple when taken on the nose, but this distinction can actually throw you for a loop if you’re not careful. Because there are some situations where it’s hard to tell the difference between a product and a service.

For example, web design. If, this year, you paid an independent contractor to design and build a new website for your business, did you technically pay them for the service they provided or for the finished website product?

In this case, I would classify the expense as having been for a service, but I can totally see how you might assume otherwise. Our digital age makes things tricky sometimes.

Also, rent is considered a service--seems weird, I know.

If ever you feel confused about this, either reach out to the independent contractor in question and ask them how their clients typically classify their work, or reach out to me! I’ll be happy to think through it with you.

If you determine that you have indeed paid more than $600 within the past year to a particular independent contractor in exchange for a service, onto the next thing.

You’ll need to request Form W-9 from the applicable independent contractors.

WHAT IS A W-9?

Form W-9 is a tax form used to confirm an independent contractor’s name, address, and taxpayer identification number (TIN) in order to determine their business classification, which will also affect whether Form 1099 is required.

Don’t worry--Form W-9 will make the classification clear. You just have to know what to do with it. In general, payments to corporations don’t require Forms 1099. But sole proprietorships, partnerships, and limited liability corporations (LLCs) do. Unless that particular LLC elects to be taxed as a S- or C-corporation.

If you get stuck, just reach out to me.

Many business owners elect to request Form W-9 at the beginning of their relationship with any independent contractor to whom they anticipate paying more than $600 per year in exchange for services.

That does simplify things, because you’ll get to tax time already having the correct information on file. So, if you want to get ahead of the game, you might put that idea into practice in the coming year. But no worries if you don’t.

QUICKBOOKS CAN HANDLE YOUR W-9S AND 1099S!

Because… Did you know that you can use Quickbooks to quickly generate Forms W-9 for distribution to your independent contractors?? And, you can even make Quickbooks file your Forms 1099s for you, with both your independent contractors and directly to the IRS--not joking!

JOIN MY QUICKBOOKS MASTERCLASS TO GET ALL THE INSIDER KNOW-HOW

Quickbooks really is the bomb, and if you’re either new to it, or unfamiliar and interested in seeing what it’s all about, I have a whole digital course available that will show you the ropes!

The information in my Quickbooks Masterclass will be invaluable to you as a business owner for tons of reasons… And among those are that next year, tax time will be a breeze!

Won’t it feel good to have all of your tax ducks in a row well in advance, and to get to completely enjoy the business year-end? You bet.

And hurry--doors to the course close indefinitely on January 31, 2021! Which is conveniently also the deadline for Form 1099 submission.

So knock out two birds with one stone, make the deadline, and never again have to panic-Google things like ‘which of my vendors should get a 1099’ or ‘how to submit a 1099’.

Learn more about what’s included with the course by clicking HERE, and please feel welcome to reach out to me with any questions.

I’ll be delighted to have you join us!