Unbelievably, year-end is right around the corner. The first line of business in January 2023 will be to file and issue any necessary Form 1099s. Although I am fairly new to the profession and my role as a CPA, I have quickly come to realize that taxpayers do not particularly like sending or receiving 1099s. Business owners and clients often do not collect the required information to accurately or timely issue a 1099. This leaves taxpayers and their accountants in a fury to gather information by the filing deadline, January 31st. There are some misunderstandings surrounding this tax task that I’d like to help clear up and make your 1099s one less problem in the New Year.
Who Should Receive a 1099?
The IRS requires individuals and businesses to file Form 1099, which is an informational return, to inform the IRS that they have paid $600 or more to someone who is not an employee, during the normal course of business. You are required to issue a 1099 to “non-incorporated” vendors or contractors, meaning individuals, partnerships, Limited Liability Companies (LLCs), Limited Partnerships (LPs), estates and trusts.
For example, a rancher who pays an LLC for machine hire to harvest or plant, must issue the LLC a 1099-NEC for the services provided. Additionally, this rancher may pay for a pasture lease; as the lessee, they will issue the lessor a 1099-MISC for rent. If the rancher’s livestock requires attention at the local veterinarian clinic, the rancher’s payment for the vet services could require a 1099-MISC. Essentially, if you are deducting the services or rental expenses on your tax return, you will likely be required to issue a 1099 for payments of $600 or more.
How to Collect Information from Vendors?
It appears that the issue surrounding Forms 1099 is collecting the necessary information to accurately report the form. You may ask, “What exactly needs to be reported?” You are required to report the name, address, tax I.D. number (Social Security number or EIN) and the total amount paid to the recipient. The IRS holds the stance that it is the taxpayer’s, or issuer of the 1099’s, responsibility to collect this information from vendors before payment is made.
To ease this responsibility, request Form W-9 from any vendor or contractor if you believe there is chance you will issue them a 1099. Form W-9, or formally titled “Request for Taxpayer Identification Number and Certification”, will provide you with the tax I.D. number, address and indicate if they are incorporated. Instilling this practice in your normal course of business will ensure you have all the essential information on hand, should you be required to issue a 1099 after the start of the year.
The Price to Pay
Yes, it may be a hassle to collect this information upfront, but the risk of not filing or inaccurately filing Form 1099 is too great. The IRS now requires taxpayers to answer questions on their tax return to indicate if they were required to issue Forms 1099, and if so, did they file the required forms. Under penalty of perjury, you must indicate that your tax return is accurate and complete. If you answer “No” to the latter question, you may be subject to penalties and fines varying from $50 to $270 per form, depending on how late the 1099 is filed. If a taxpayer intentionally disregards the requirement to file, a minimum penalty of $550 per form can be imposed. Always keep filing and issuing documentation with your tax files.
Mark January 31st, 2023 on your calendars, as this is the deadline to file and mail Forms 1099 for the 2022 tax year. Do not let the deadline come and go, leaving yourself wishing you kept better records throughout the year. If you have any questions about Forms 1099, reach out to your trusted CPA.
Published in the Victoria Advocate
Carlee H. Gibbs, CPA is a staff accountant for Keller & Associates CPAs, PLLC.