WEBINAR – Best Practices for 1099 Compliance Including the New 1099-NEC and Updated 1099-MISC

All right. Welcome to today’s webinar. I appreciate everybody joining us.  We are going to be talking about best practices for 1099 compliance including the new 1099-NEC and updated 1099-MISC forms.  If you have some questions during the webinar, I’ll try to get some of the to those during the webinar or I may pick those up at the end of the the webinar. But feel free to post that in the Q&A section and we’ll try to do that. This is not a CPE webinar. We do have a CPE webinar that you can watch. There is a cost to it with our partner K2e if you’re looking for CPE, but this is just a free webinar that we’ll be walking through today. Hopefully we’ll be able to do that in the future as we are looking into the process to do that. 

I do have a question that will the recording be available to us at a later date. Yes I will be sending out an email in the next day or two, hopefully tomorrow, with a link to the webinar and a link to the slides that we’ll be talking about today. All right, so let’s get started.  My name is John Croyle. I worked as a controller for 25 plus years and have a CPA, an active CPA, and an MBA in finance. I started W9manager out of my frustration in dealing with the W-9/1099 process and we are working to automate the process from vendor onboarding through the issuing of 1099 forms at the end of the year.  And so we’re going to talk just a little bit about just a couple minutes about W9manager and then the rest of the two hours will be on the best practices around 1099s.

So our goal with automating the process is to sync w9 manager to your accounting platform so we just rolled out quickbooks online last week and then zero we rolled out in december and we’re looking to add additional erps in the upcoming year some of the most popular ones including netsuite and microsoft dynamics and sage and intact and some of those so the goal here is that every time that you add a vendor within your system it’s automatically picked up in w9 manager we automatically send out a request for the w9 form it’s uh when it goes to your vendor they’re able to upload an existing w9 form or create an a brand new w9 form from scratch and electronically sign it and then we walk them through a guided process a step-by-step process with contextual help on every step of the way to help them create a correct and complete w9 form you know when you when they try to key in a single member llc we tell them that they can’t select that they have to select the owner of the single member they have to key in nine digits they have to have a name on line one so a lot of different things because um as a controller a lot of times we would when we did w9s and 1099s we would we would get those w9s in and we take a look at them and then they were wrong and we would then have to send out a request again at year end so um we sent out four additional reminders once the w9 is the initial request is sent out on the second fourth seventh and tenth working days we then track the w9 status you’re able to see that all in one place all of your w9 so remember your sync to your accounting system so with one look you can see that hey i’ve got all my w9s in for all of my vendors and we then tell you whether it’s reportable on a 1099 form or not uh you simply just key in that the payment type that you’ve made hey i paid an attorney paid for medical services i paid for royalties um a certain type of settlement and we’ll tell you based on the tax classification of the w9 and the payment that you made whether it’s reportable or not and then the goal is you know at that point time you’ve pretty much completed 95 percent of the work that you have to do at year end you should be able to just hit a button export out that file add the amounts that you paid and then import them in to our partner taxed e-file if all goes well in the next week or two we’ll actually have a direct integration with them as well within w9 manager so there’s a little bit about w9 manager which we’re very excited about a lot of things that we’re doing we also by the way offer tin matching which we’ll talk about a little bit later in the webinar today which we feel is very important so you can do bulk 10 matching with us as well some of the learning objectives we’re gonna be walking we’re looking at today we’re gonna we’re gonna walk through the the end-to-end best practices for complying with irs w9 and 1099 miscellaneous and nec information reporting regulations this is for calendar year 2020 which should be most of the stuff is due by the end of this month or february 1st because the 31st is on a weekend we’ll learn how to the irs classifies employees versus independent contractors learn the importance of correct and complete w-9 forms illustrate the value of irs 10 matching and how to implement in your company understand 2020 irs backup withholding requirements penalties due dates and b notice roles identify payments that are reportable on the newly updated form 1099 missed and we’re going to discuss the brand new form 1099 nec


so let’s talk a little bit about information reporting so organizations are required to report certain reportable payments made in the course of their trade or business to the irs and this process is known as information reporting there are over 30 different information tax returns sorry information tax returns that are required to be submitted to the irs and this process allows the irs to cross-check the income reported from these organizations with the income reported on the individual and entities tax return this in turn helps increase the likelihood that all income tax is paid is reported and therefore all taxes paid some of the more common information tax returns are the form w-2 which is the wage and tax statement which we’re all familiar with having most of us having worked as an employee in the past and there are 17 different form 1099s including the 1099 miscellaneous form the 1099 int the 1099 div for dividends of course the new 1099 nec which we’ll be talking about form 1042 s is for payments to foreign persons and then there are several five different 1099 sorry 1098 forms these are around the mortgage industry and then form 54-98 which is to help you deal with the irs information has to be reported as well as hsas and coverdale education savings accounts so let’s look a little bit more closely at the w-2 versus the 1099. this is all about whether you are correctly classifying the workers that work for you and they can be correctly classified as either an employee which would mean they would get a w-2 or an independent contractor which means they would get a 1099. the potential liabilities can be substantial if a worker is incorrectly classified and the laws may differ between the irs state law and the fair labor standards act now on the right there you can see that there’s some significant potential penalties and the exposure is incredible if you get this done wrong mainly if you classify them as an independent contractor when they should have been an employee if you do that you know you potentially could pay 1.5 of the wages paid to the employee 20 of the employees share of social security tax the employer and employee portion of all fica taxes federal and state taxes that were required to be withheld from the employee but were not etc etc the main point here is make sure that you are correctly classifying your workers we’re going to talk a little bit about how the irs does this and they look at three different um types of control or areas that can kind of help them assess whether they’re a an employee or an independent contractor and it’s not necessarily that one of these will put you over the the top and say hey this is an employee because of this they all kind of lean one way or another so you kind of have to look at the the the employment situation or the contractor situation in totality and see where things are leaning toward so the first one we’re going to talk about is behavioral control a worker is an employee when the business has the right to direct and control the work performed by the worker even if the right is not exercised so here you want to look at the type of instructions given the degree of instructions the evaluation systems and the worker training obviously the more control that you have the more likely they’re going to be an employee the less control you have the more likely they’re going to be a contractor under financial control a worker is an employee when the business has a right to direct or control the financial and business aspects of the worker’s job so did the company provide the equipment to the worker to use and if they did that would lean toward them being an employee does the worker have the opportunity for profit or loss if yes then that would lean toward them being an independent contractor what is the method of payment regular wage or payment by job if it’s a regular wage that’s leaning toward them being a w-2 employee payment by job and make that an independent contractor and are the workers services available to the market if they are that would lean toward them being an independent contractor then you have the relationship you look at the type of relationship and it depends upon how the worker and the business perceive their interaction with one another are there written contracts which describe the relationship you know if you’re if it’s a written contract it says their employee that doesn’t necessarily mean that they are just leans toward that area if they it’s a written contract it says their independent contractor then that would lean toward them being an independent contractor is the worker provided employee type of benefits obviously if they are that leans toward them being an employee and then the more permanent the relationship and you know if it’s a permanent relationship that’s more toward an employee and if the services are seen as a key aspect of the regular business of the company point toward an employee relationship this is a really important concept and uber and and lift have been fighting this in california because california passed a law ab5 that extended employee classification status to gig workers california companies had to use a three-pronged test to prove workers or independent contractors not employees specifically it hurt uber and lyft because they um had to classify their workers as employees and then on august 10 2020 a california judge ruled against lyft and uber for not complying with the new law and then there was a lot of backlash that was going on so on september 4th ab2257 was passed and exempted a long list of job categories from ab5 but uber was not included in that law that was passed so they actually took it to the voters just this past november with proposition 22 that passed in november and now their drivers will remain as contractors the main issue for uber was that test number two where they had to prove that the worker is performing tasks that are outside the usual course of the company’s business activities so that was one of the the prongs of that three-pronged test that they could not pass so now with prop 22 they are labeled to move forward and could classify their their drivers uh as contractors so anyways just to give kind of give you a an overview of how big this issue is i it was the large it was the most amount of money spent on a proposition in the state of california to get this to get this through and help them remain as contractors


and there are a bunch of other irs resources that you can take a look at um understanding employee versus contractor designations you can actually complete form ss8 and send it to the irs and they will give you a determination of your worker status that’s always a recommended approach um to do and then um um you’ve got some additional things here the publication 15a and the irs voluntary classification settlement program if you know you’ve done it wrong you can work through that as well we’re going to be talking about independent contractors and and so if you’re an employee you’re really not a part or you’re paying employees those payments are really not part of what we’re talking about today we’re going to be talking about payments made to independent contractors and vendors and trying to determine if there is a reportability requirement from the irs on a 1099 form so we’re gonna we’re going to ask a couple questions as if this was a cpe that we’re doing just to i think it’s kind of a good way to make make you think and kind of look at the information again as long as we have time we’ll continue to do that so so question number one which one of the following is an irs indicator that a person is a 1099 contractor so the person uses their own personal laptop the person is required to work from eight to five a person attends company training seminars and the services provided are a key activity of the business so again which of the following is an iris indicator that a person is a 1099 contractor and the answer to that is a the person uses their own personal laptop of course you know if the company’s providing their laptop that means that they’re providing the equipment and it leans toward them being an employee if the worker provides their own personal laptop that’s them providing their own equipment it leans toward them being a independent contractor if a person is required to work from eight to five that’s control over what they’re doing that leans toward employee same thing with them attending company seminars or providing key activities services provided are key activities of the business


okay next we’re going to talk a little bit about the importance of doing a submitting or sorry obtaining a correct and complete w9 form from your vendors this is really the start of the process you’ve got to have a correct and complete w9 form from your vendors in order to have correct 1099s that go out to the irs and then avoid obviously you want to be correct because you know you want to have a good relationship with your vendors you want to provide them accurate information but you also want to make sure it goes to the irs correctly so you don’t get what we’ll talk a little bit later are error notices or cp 2100 notices from the irs which then opens up a whole nother can of worms around the b notice process so what is the purpose of the w9 form itself so form w9 is used by companies to obtain the tax classification and taxpayer identification numbers from vendors and independent contractors this information is then used to determine if the company is required to send the vendor or contractor the related information return or you typically a 1099 form the best practice for companies uh is to request a w-9 form from all of their vendors and contractors uh prior to releasing payment to them so getting that done before you pay them is critical and we’ll talk about some of the penalties that relate to that that are significant here in just a little bit one thing to note is that w9s never expire so unlike w8s which expire every three years w9’s never expire and you can use the same one now obviously if you’re going back to like 1984 there’s information that you have that you have on the new w9s that you need especially around llcs so it’d be wise to update your w9 forms occasionally when there’s additional information that you need to make decisions about reportability so the w9 form should only be completed by what the irs calls as a us person this is very important only a basically a u.s citizen or a resident alien or an entity that’s that’s uh organized in the united states and the laws of the united states uh can complete a w9 form so that’s one of the nice things about having your vendor sign the w9 form is that you are eliminating a lot of liability if they happen to be a foreign vendor and you open up that can of worms so by knowing that they’re a u.s person it really helps you understand what you need to do and do it correctly and avoid additional liability from the irs if you’re not a us person you would likely need to provide a form w8 or form 8233 to show that you are a foreign individual or an entity and another additional um a whole other additional track that we’re not going to talk about today in your responsibilities in reporting payments made to foreign vendors or individuals so i’m also check the date on the top left corner of the form as it’s updated occasionally by the irs the current revision should read revised october 2018 so if you’re sending out w9s that are older than that just go out and download the new w9 form and you can move from there or better yet use w9 manager because we are always up to date on the forms that we uh that you use a couple things about the w9 form


you online number one this is the legal name of the entity uh or individual and this is what’s on their tax return and then line number two um if if if you don’t think that your customer will understand like you know if you’re the independent contractor you don’t think that your customer will understand your name on line one maybe it’s an entity name that they don’t understand then you would put your business name your disregarded entity name or your dba on number two to just kind of help identify you know who the entity is on that w9 form that’s really the only reason for the line on number uh line number two of course on number two is optional


line number three you’re going to check one box so if you’re playing a w9 you’re going to check one box for your u.s federal tax classification this should be the tax classification of the person or entity that is entered on line one and also the tin number that’s provided in part one so all those need to be matched up you shouldn’t have you know somebody providing the ein of their single member llc their tin number for that and providing the name of the individual they need to match they all need to go together llc should check the box and they need to include one of three different letters either c s or p why is this important because the c or s corporations are typically not 1099 reportable so knowing that can help you avoid a lot of extraneous reporting that’s not necessarily nonprofits check and fill out the the other line down below similar with the government so let’s take a look at the llc specifically next and then we’ll look at some of the exemptions


so llcs are going to uh select either a c now this this means that they have filed form 8832 so they’re an llc they’re a company they’re not a corporation they filed form 8832 with the irs to be taxed as a c corporation and that’s been accepted by the irs when they do that they are now treated for tax purposes as a corporation so anytime you read something in the 1099 rules regulations about corporations it applies to a llc c or an llc c corporation same thing is true with a an llc that is that’s filed 2553 with the irs to be treated as an s corporation for tax purposes they are going to be treated as a corporation anytime you read something in the 1099 rules about corporations llcs that are taxed as an s corporation as well as s corporations are treated as corporations so very important because corporations are exempt from receiving 1099s in most cases we’ll talk about those exceptions here in just a minute if you have an llc that has more than one owner and they have not elected crs corporation they are treated as a partnership and they are most of the time they are reportable uh when you make payments to a partnership there if it’s a reportable payment uh to a partnership llc partnership then it’s um it needs to be reported to them a 1099 needs to be sent to them


and lastly you have a single member llc this is a an llc that is owned by one individual or entity and they are considered what’s called disregarded by the irs and we’ll talk just a little bit about single member llcs because they are one of the most um one of the areas that people make the most mistakes on when it comes to single member llcs they also cause a lot of errors to get back from the irs when you file your 1099s with single member llc information that’s not correct


so basically when is a single member llc disregarded by the irs when the single member llc has not selected crs corporate status they um and the irs at this point time looks to the owner so there’s only one owner of the llc they have not selected crs corp status the irs is disregards that they don’t they don’t want the information from the single member llc they want the information of the owner of the llc um if it’s and one of the things that’s important to notice here is that if you’re foreign ownership then you can’t fill out the w9 form you have to fill out the w8 or 8233 because again even if you’re a u.s llc that’s a single member if you’re owned by a foreign entity or foreign person the irs looks past the llc sees the the the entity or foreign you know person and wants the information from them so you would they would fill out a w8 or w or form 8233 in their name or the foreign entities name um so just important to know that that’s why it’s important to get a w9 form back from your vendors because sometimes they’ll tell you hey i can’t fill this out because i’m not a us person


a couple things about the single member llc the name that should be used will be the name of the owner of the llc so if it’s owned by a single individual then you would put the individual’s name if it’s owned by another company you put the company’s name if it’s owned by another single member llc you look to the owner of that single member llc until you find you get past you know the disregarded entities uh the business name would be you could put the the dba uh that really what you want to use the name uh when you send a w9 form to the customer you want to use the name that the customer will recognize on that line the dba maybe they recognize the disregarded entity name or the llc’s name that they pay line three you want to use the federal tax classification of the person that owns or the individual that owns the single member llc and then the 10 should match the name that you provided it should be the the name of the owner of the llc and again not again i haven’t actually said this yet the 10 is the taxpayer identification number and there are different various 10 types like a social security number is a 10 a and employer identification number is a 10 and an individual or an i10 what they call an individual taxpayer identification number is a 10 there’s also an adoption tin number so all these types of tins can be used on the w9 form but the 10 is the overarching description for a social security number or an ein employer identification number etc


so a couple examples if you’re a disregarded identity if you are a single member llc again you have not selected c or s corp status as the llc with the irs and you’re owned by an individual you’re going to use the individual or sole proprietor’s name on line one you’re going to key in the individual’s name um i’m sorry um you’re gonna check the individual sole proprietor single member llc box on line three you’re gonna key the individual’s name on line one you’re gonna key in the tin number of the individual that owns the llc in part one and you’re gonna optionally put the name of the llc or business dba in line two if you’re a single member llc that has elected s corp status then you’re just gonna fill out the information related to the llc because you’ve elected s corp status and you’re considered a corporation at this point in time not no longer disregarded and again if you’re a single member llc it’s owned by another single member llc you’re going to continue looking until there’s an owner that is not a single member llc


uh looks like i missed a question here let me let me see here if a task performed is a key activity this is going back to the worker classification that we talked about earlier if the tax performed by a key activity is but a short term like two weeks flexible hours contractor does not work for others and uses his own equipment do we need to classify such person as an employee like the drivers perform you know i i don’t want to get into classifying employees without all the information involved i can only speculate here but the task performs the key activities but a short time like two weeks flexible working hours contractors work for others and use his own equipment do we need to classify um yeah i’m gonna that’s gonna be a tough one because you’ve got different things that are that are involved in that um i would always say that if you are unsure then go with the employee creating that making them an employee unless you can definitively prove that maybe you fill out the w or the ss8 and get a a ruling from the irs on that for future times that you do that but there you’ve got kind of two big events that are kind of offsetting each other so it might be a well it might be a good idea to reach out to the irs and have them make an assessment of that


so review question number two which of the following is the correct name and tend to use on the w9 form so you have a single member llc in this case should you use the disregarded entity’s name and tin b you have a single member llc should you use the name and tin of the llc’s owner and then c multi-member llc you should use the name should you use the name intent of one of the llc members and for an s corporation should you use the owner’s name n10 on the w9 form so which is the following is the correct name intend to use on a w9 form the answer is hopefully you got this by now the name intent of the llc’s owner for a you don’t want to use the name intent of this of the single member llc because it’s disregarded the uh the irs wants to see the owner’s information multi-member llc you don’t want to use the name intent one the llc members you want to use the name intent of the llc and then s corp you want to use the name intent of the s corp itself


a couple quick things here we’re going to talk here about exemption codes which is uh right here on the right-hand side number uh box number four here or line number four there are two different types of exemption codes now this means not that you’re exempt from getting a 1099 form this means that you’re exempt from backup withholding so it’s a big thing to understand this does not mean that you’re exempt from getting a 1099 and sometimes it does i mean sometimes they correlate but what they’re saying here is that they are exempt from backup that’s what uh the first one is on the left-hand side exempt payee so if they put a code in there they’re saying that they’re exempt from back and withholding and you take a look at that make sure that’s correct if for some reason um you’re required to do backup withholding or you think you’re required to do backup withholding generally individuals including sole proprietors are not exempt from backup withholding corporations are generally exempt from backup holding for certain payments including interest and dividends on the right-hand side this is exemption from fatca reporting so fatca relates to a person’s um submitting this form for accounts maintained outside of the united states by certain foreign financial institutions so for most of you fatca won’t apply but if you’re you’re paying making payments outside the united states


for that are related to foreign financial institutions then you need to take a look at this and see if this uh entity is exempt from faculty reporting


sections five and six are for you to complete your address uh for completely an address this address is just where you want the 1099 to be sent section seven uh this is where you list out your optional accounts we typically recommend that people leave this blank unless you have a specific need for that otherwise you have to continually fill out w9s for different customers so if you leave it blank they get the w9 it’s all they really need that just really helps you identify who the account it relates to so if that’s not needed we suggest leave that blank and then the tin number which is either the social security number or employer identification number is in part one it’s critical that you make sure that the the ssn or ein match the name on line one so signatures there’s a signatures in general are not required which is really interesting on most w-9s in the united states outside of the financial industry fatca and b notices so for the financial industry w9 is related to certain financial transactions like bank interest dividends broker accounts and real estate transactions are generally required to be signed when a company makes fatca payments they are required to presume that the payees of foreign individual or company paid as foreign unless they signed w9 is received and there are sometimes there are withholding requirements of 30 on that so it’s important to know um when you have to withhold when you don’t and then we’ve got b notices sometimes the iris requires that assigned w9 formulas are obtained when a company receives the first b notice from the irs we’ll talk about b notices in just a little bit


all right let’s talk about uh let’s talk about tin matching um i’m just i’m just thinking here i wanted to say something a little bit more about sine w9s you know in general it’s it’s it’s good to get them signed we recommend that you get them signed unless you are familiar with all three of those areas you’ve talked about you know you’re not making faculty payments you know you’re not making financial payments and you know and you’re not dealing with a b notice situation so um you know in general t’s are just to get them signed one of the nice things about you know w9 manager is that you can click off on it and required to be signed and the user in order to send it back has to sign the w9 form itself and they can’t send it back without doing that so tin matching is a free service from the irs which is nice now of course if you need to match today it actually can take you know several months to get all the access to do that and to get one of your your employees set up to do 10 matching they do have to provide a cell number so they can do two-factor authentication when you log in and they have to authenticate the individual or the person that’s doing it so somebody an individual in the company has to provide their own personal financial information in order to get approved by the irs and that can sometimes be a little tough sometimes employees don’t want to go provide all their personal information on their personal cell phone in order to get authorized by the irs to do 10 matching so anyways but it is a free service and we encourage everybody to do 10 matching we do provide a service to do bulk 10 matching it’s uh you know you do 110 matches for 99 which is pretty cheap so if you need to do that feel free to log into w9 manager you can create a free account and then just sign up for the 10 matching process for the irs though it’s a uh it’s a free service and basically what the irs does is it takes the name on line one of the w9 form and compares that to the tin number that’s been provided and that’s very helpful in this sense that that will help you avoid getting error notices from the irs a lot of the error notes that you get are based on these 10 name mismatches so the irs will do this when they get a 1099 and then send these error notices out when they don’t match and then you have this whole additional raft of work that you have to do and including additional penalties and interest if you don’t do that correctly our best practice is that you tin match on each w9 format as it’s received assuming that it’s going to be a reportable vendor and then at year end for all payees receiving a 1099 form access to the tin matching application we talked a little bit about that but there’s a link there to access the application there’s also a publication that you can read that gives you complete information about the tin matching process


basically you just basically are going to log into the irs e-services application you access the tin matching application you can actually send submit 25 name or 10 combinations for an immediate response or you can send them to 100 000 names and 10 combinations for a 24 hour response back from the irs and if you still receive a cp 2100 or 2100a which are these are the error notices back from the irs by doing tin matching you have established due diligence and reasonable cause if the information contained in their records matches the irs records of course we talked about third-party services that are available


these are kind of the codes that you’re going to get back on 10 matching you you really want to get a code 0 which indicates the name and 10 combination matches the irs record but there are a bunch of other different combinations or codes that you can get back from the irs uh telling you what what the issue is and then you basically just call up your vendor and say hey look uh i did a 10 match uh something’s different here something’s wrong here’s what the irs said can you take a look at it and submit a brand new w-9 form form us um


the 10 match i got a question here is the tin verification only supposed to be used for 1099 purposes can you use it to verify employee socials i have only seen where uh when i looked at the tin matching that’s a great question and i’ll take a little closer look at that but i’ve never seen where you can use that for employee or heard about using it for employee socials and the irs actually specifically says that if you submit it it has to be for a reportable payment that you’re going to be making in order to do the tin matching now whether they would consider obviously a payment to an employee is reportable whether that’s specifically down to a 1099. i’d have to look into that but my guess is that this only relates and i only have ever seen it used around the 1099 process


a couple things about the tin matching they don’t take the entire name that you submit they take pieces of the name they basically take a four digit name control and then compare that against the the tin number that was submitted so for like an individual they would take the first four digits first four alpha numeric characters of the person’s last name and then partnerships and corporations you can see there as well they take a look at that they have specific rules for partnerships and corporations to do that so just just so you know that that’s the case that they they do they again they don’t take the full name so it’s important so sometimes when you have errors sometimes that’s the way the name was entered in you know you could take a look at that a little bit more closely with your your clients or your vendors and and see where the mistake could be made at that point in time um there are some special roles for name controls so the ampersand it’s the and sign and the hyphen are the only special characters allowed in the name control um the name control can have fewer but no more than four characters spaces and blanks are not a part of a name control for example uh the name control for joe doe trucking is joe j-o-e-d it’s all one word um and the word the at the beginning of your business name is not used in your name control so just helpful to understand that when you get a tin matching um issue back you can understand how the iris looked at that and communicate that to your vendor


so review question number three what are the advantages of tin matching so you’ve got reduced risk of penalties reduced number of b notices


increase 1099 reporting accuracy or all of the above so again what are the advantages of tin matching


and it’s all the above reduce risk to penalties reduce number of b notices and increase 1099 reporting accuracy all right let’s talk a little bit about backup withholding


so the irs requires that companies backup withhold 24 of everything paid to a vendor for specific types of payments and certain tax classifications when the vendor does not provide their tin number this is going to include things like rents royalties commissions non-employee compensation which is on the new 1099 nec certain other payments are subject to irs backup of holding at 24 failure to back up a hold when required can result in the payor or the companies making the payment itself being held responsible to pay the entire 24 to the irs so if a company pays a vendor a million dollars which isn’t really that hard to do and did not appropriately back up withhold the 24 when they didn’t get a w-9 form the company can be responsible itself to pay 240 000 to the irs plus penalties that can be a career-ending move if you don’t get the w-9 up front before you make a payment or followed up quickly thereafter i know there are certain circumstances where you know you’ve got to have a rush payment or your your vp or your owner or somebody standing over you and say hey we got to get this payment out today but you need a process in place to make sure you follow up when you don’t get the payment before you make a payment so make sure you have a process in place to make sure you get a w9 form before you make the payment and if you miss it that you also have a process in place to catch that immediately thereafter this is a great year to understand why that’s important because a lot of businesses are going out of business so maybe back in february you did business with a company you paid them a million dollars but you get their w-9 said hey i’ll get it at your end well now you’ve got thousands or tens of thousands of business that are going out of business you can’t even get a hold of them you get an audit by the irs you say well i couldn’t get it because they were out of business they’re like hey you should have gotten this before you made the payment or follow the backup withholding responsibilities so um you know our suggestion is that you get this before you make a payment matter of fact we suggest that you get it when you sign the initial agreement with the vendor before you even do business um at that point in time because once you do business with them then you’re legally required to pay them even though you’re allowed or required by the irs to withhold 24 percent you know you’re still required to make a payment and then you have to actually do the withholding and submit the you know the the the payment to the irs within the certain time frame you know um so it’s um it’s a huge pain to have to do back and withholding and we we recommend that you just get the w9 up front or don’t do business with the vendor


we’ve got a list here of payments that are subject to withholding backup withholding not not all payments are subject to back withholding but these are the forms and the types of payments that are that are responsible to have backup holding applied to them in the event that you don’t receive a w9 up front now also if you don’t get a w9 and you have to back with hold so you have to follow all the rules and regulations and and file the deposits very similar way that you have to to make payments for the w-2 process when you’re doing your employees you know if you’re a monthly depositor or semi-monthly depositor all that kind of stuff you have to you have to follow those same exact rules for backup withholding then you have to do what’s called an annual solicitations on top of that so you have the initial solicitation where you know you have the initial time that you went to pay the vendor you say i need your w9 i didn’t give it to you made a payment that’s the initial solicitation then you have to make what’s called the first annual solicitation and the second annual solicitation so the pay doesn’t provide a 10 number when you initially asked for it you must then make the first annual solicitation by december 31st of the year in which the account is open or the transaction occurred


so that’s a pain in the butt and then you’ve got the second annual solicitation they still don’t provide you a 10 and you’re still making them payments then you have to make a second annual solicitation by december 31st of the year following the calendar year so you can spend a significant amount of time and resources processing and tracking irs back withholding and annual solicitation requirements and then in addition the penalties for not managing this process right are very extensive so that’s why most companies have a process in place to get a w9 form done before payment is made and really should be on the front end when the operations team or whoever’s working with the vendor gets it done before you even do business with the vendor


all right let’s go to the next slide


um let me look at chat here i think i’m missing chat uh let me see if i’ve got a few questions here let’s just take a quick second answer those questions in chat i believe let me look here


um yes we will be covering the 1099 form so this is we go about two hours on this webinar so we are about to uh i think it’s uh the next section after this that we’re talking about the 1099 uh form uh i’ve never heard of the 1099 div 1099 div is your 1099 dividends it’s for dividends so you know schwab e-trade when they pay you know you pay dividends or a company pays dividends when it goes through like an e-trade or schwab they’re going to send you a 1099 dividend statement at the end of the year which lists all your dividends you have to report on your usually to individual but sometimes obviously companies get that as well so okay let’s continue on track progress during the year


so this is just a quick slide to say look the most important step to successfully managing vendor payment compliance is setting up a solid process during the year you know make sure you get a correct and complete w9 form from every vendor file the form so you can find it and record the w9 information to help you make correct 1099 or portability decisions so don’t pay a vendor until a w9 form is received make sure you have a process in place where you can track and see all of your vendors at any point in time and where the status of their w-9s are during throughout the year make sure you have a process to make sure you get a w9 and it’s correct and complete or somebody’s reviewing that when it comes in up front to make sure all the information is complete make sure you have a place that you can file the w-9 to the vendor file and then make sure that you add the information to the vendor record so that you can easily get that information when you need that at your end one of the nice things about w9 manager is that we allow you to print out a report that’s tied to all of your w9 forms for all of your companies so the last place i worked at we had 12 different companies that we had to manage we could manage all of our w9s within wdi manager we could export out all if we had w9 manager then we didn’t and it was a pain but you can export out a report to list all the companies all the information from all of your w9s in one report um and um it gives you one glimpse of all of your vendors in one one place all the w9s in one fell or you know one single report and then there’s the vendor summary screen which shows you all of the vendors that you have in the status of all the w9s at any point in time all right so let’s talk about again we’re talking about best practices here so um we’re going to talk about how to identify non-reportable payments it’s kind of the first step in looking at your 1099 process this year once you’ve got a w9 on file for every vendor you know it’s correct and complete then you’ve got to start looking through all of your vendors to see who’s reportable and who’s not reportable so again with w9 manager you just select the type of payment will tell you that if you’re doing it manually you kind of one of the best practices is just to go through and eliminate as much as you can to start you know you’ve got 500 vendor payments well where do i start well start by getting rid of the non-reportable payments and we’re going to talk about each one of these you’ve got corporations payments under 600 tax-exempt entities goods that were paid for employee payments credit card payments and customer refunds


so one of the big things that the irs allows that’s considered not non-reportable are merchandise telegrams telephone freight storage and similar charges so what is that it’s kind of i always thought that was kind of mysterious so having done a good bit of work at trying to understand what that meant we’re going to talk a little bit about that so merchandise in this case equals goods so merchandise typically refers to tangibles they can be physically touched movable goods and commodities held for sale and the irs in a private letter private literature ruling stated that the word merchandise is commonly defined and understood to include goods and commodities held for sale the irs also referenced black’s law dictionary that defines merchandise as a movable object involved in trade or traffic that which is passed from one person to another by purchase or sale so when you’re looking at whether something is a service or a good i mean some things can get a little tricky to figure out at times apply that definition to it so telephone service is another thing that’s not reportable and this includes both landline voice over ip and mobile services items similar to telephone service include cable satellite radio computer network services and utilities


one of the things that’s been very helpful and trying for for me and understanding what the irs is thought is around this is what’s this thing called um well let me back up in 2004 the irs issued revenue procedure 2004-43 now at that time this was a an optional procedures companies could use to determine what credit card transactions were reported on form 1099 missed using the merchant category so when a payment was made by credit card they would pull the merchant category off of that and then they could say hey this is reportable or it’s not reportable because at that time companies were responsible for reporting payments made by credit card today if you make a payment by credit card or debit card that is now the responsibility of the merchant provider to submit a 1099k or issue a 1099k to the payee but back in 2004 companies had to do that and they listed out all of these merchant codes on what was reportable and what wasn’t reportable and so it was very insightful now you know this this optional this procedure is now obsolete but it still gives you some insight into what the irs was thinking at that time when it comes to this merchandise telephone telegraph freight that kind of stuff so some of the things that they considered to be exempt were freight and similar charges so if you’re paying for motor freight carriers and trucking railroads tolls and bridge fees and they have a whole bunch here they’re under telephone services storage has similar charges telegraph and similar charges and then they have a huge list of merchandise and similar charges which i’ve just listed out a few of those as some examples but you can refer to this revenue procedure to kind of give you some ideas on what’s for what’s what’s reportable and what is exempt


and then we’re going to talk a little bit about that when it comes to uh what is reportable in just a little bit here


so another concept that we’ve got here is is called the primary purchase what’s the primary purchase what about purchases that include both goods and service components and you must look closely at the primary goods or services purchased in order to determine whether it’s reportable or not now you can always take whatever you have and you can separate it out and make it you know look i paid for this amount of services and this amount of goods you can always exclude the goods and report the services um but that can be very owners at times so what the irs says it says hey you know they gave us an example this example of auto services versus repair and their example is if you take your car into a dealership for service the primary purchase is auto repair a service the entire amount would be 1099 nec reportable as a service even if the cost of parts was more than the cost of labor the repair shop did not hold itself out as a dealer in parts and the customer did not specify the kind of parts to be installed the parts were incidental to the obligation to repair the car and there you can see the revenue ruling where that came from so that’s helpful to know that if your primary purchase is a service your primary purchase is a a a good then you can just either report it or not report it


however if you visit a dealership you know to verge to purchase a vehicle the primary purchase is a tangible good and is not reportable so you on the one hand you have the auto service you go to the auto auto auto dealership and you get your your car serviced for your company then that is going to be reportable because the repair shop held itself out as a service repair shop if you go to the dealership and buy a car or a truck for your business then that is a good and that is not reportable at that point in time of course you also have to look at you know is the auto dealership a corporation and that would negate all of that together would not have to be reported but what’s nice is you can actually start to just click some of these things off and say look this is a purchase of a good this is the purchase of a telephone telegraph you know storage and so you start just eliminating these things out of your list of transactions that you made payments throughout the year you’re trying to narrow that down to where who’s left to be reported on my 1099 form another example is restaurant meals versus catering if you purchase a standard meal from a restaurant the primary purchase is food tangible good is not reportable if you purchase something you’ve purchased catering then the primary purchase is a service and it is reportable again assuming that the entity that you’re paying is a reportable entity freight so the irs has repeatedly identified or interpreted the word freight in this section to mean a method of service for transporting goods or the cost of transportation a multiple private letter or the sorry or the cost of such transportation in multiple private letter rulings payments for transporting goods whether incidental or integral to a taxpayer’s business or therefore not reportable on form 1099 miscellaneous or form 1099 nec the freight exception is to be read broadly and consistently with the common meaning of freight now however you know if the freight is a small fraction of something that you you purchased and maybe whatever you purchased i can’t think of what if it’s being shipped to you it’s a tangible good so it’s a good so i guess that wouldn’t matter at that point in time so in general freight is not going to be


reportable so i’ll get another question here


what if an employee purchases merchandise for the company and the company reimburses the employee more than 600 is a 1099 required so i would say in general there is a a a law out there or a regulation that’s that’s that talks a little bit about this and it’s it’s specific now we need to look at it again but think about it in general if an employee is paying somebody with a credit card which is typical then the credit card company is going to make the the payment at that point in time so most of the time you know the employer there most of the time employers are paying with credit cards so it’s not an issue to deal with you know if they’re paying with cash or ach or check then you might need to take a look at that and i’ll try to send out the i forget the name of what it is but there is a there is a regulation out there that talks about these type of middleman transactions that’s what they call a middleman transactions so i will uh i will send it out to you but yes there is some responsibility there another question is do we need to issue a 1099 to a company that provides health care insurance to us and if yes what box should we use no um health care insurance is not reportable uh number one number two most of the time you’re paying a corporation for healthcare most of the time you’re not going to be paying these these companies that provide healthcare insurance are all corporations um that i’ve seen and most of the time that rely that that works for most insurance companies across the board most insurance companies are corporations so


all right i’m going to pause for a minute let me know if you can i got a couple notices here that people can’t hear me can then can everybody hear me just let me know if you can still hear me and see the presentation i just gotta notice that somebody couldn’t hear me um it may just be an individual so okay looks like somebody looks like you can still hear me all right great thank you


all right a couple other questions we’ve got here um


what if an employee purchases merchandise for the count that’s the same question there um is it obligatory to have a formal contract and an invoice besides the dually filed w9 from independent contractors so


that’s a different question that’s kind of outside the scope of w9s um we’re going to talk about w9s today we do we do recommend you get a w9 from every independent contractor that you do business with it’s always a good practice to have a contract with an independent contractor to just kind of document all that legally so that you know especially if they’re producing ip for you there’s all kinds of reasons to have contracts so best practices from my experience definitely get a w-9 and i highly would recommend that you would get a formal contract with your your independent contractor um so that just clears up and makes it clear what type of work that you’re doing what your obligations are and then issuing invoices is always recommended as well so you clearly you know identify what you’re being charged what you’re being paid and it’s just a good process to to get in the habit of doing so yes i would recommend maybe it’s a it’s a long answer to us to an easy question yes do that


next thing on identifying non-reportable payments credit card and debit cards you get a lot of questions from debit cards whether they are reportable or not credit and debit cards are not reportable uh it’s the responsibility of the bank or the merchant provider to issue a 1099-k payments made i’m sorry other payments including third-party network transactions this gets a little tricky and there’s a there’s some great irs documentation out there on what is a third-party network transaction that’s not reportable uh on forms 1099 or 1099 nec or miss that i would recommend that you take a look at


this just goes back to 2011 when the responsibility for 1099 reporting on payments made by credit cards became the responsibility of the credit card merchant these roles also apply to payments made through third-party settlement entities like paypal stripe and ebay so those are some good examples for you on what a third-party network transaction is and so you if you pay by paypal if you paid every one of your vendors by paypal stripe ebay or with a credit card or debit card you would have no 1099 reporting responsibilities at all however if you’re making payments by ach or wire or some of these things like zell and venmo and some of these kind of things where they’re just they’re just taking money out of your account and moving it for you they’re just moving money from you one account to the other there’s no obligation to pay or settle the payment they’re just helping you move money from what from your account to their account then you still have to submit a a 1099 to the vendor at that point in time


1099k this is another 1099 that the merchant provider issues and they issue it to your vendor if the gross amount of the total reportable payment transactions exceed 20 000 and the total number of transactions exceed 200 some of the states that we are currently in uh or some of the states in the united states are now requiring this to be 600 or more so if you’re issuing 1099k if you’re you know a merchant provider make sure you’re taking a look at all the state requirements around 1099 k’s we’ve got some of that on our site we have a on w9 manager there’s a section called the academy you click on that we’ve got videos we’ve got blogs but all kinds of things you can read and learn about the w9 1099 process we also have a section that deals with state requirements that you can click on and see the requirements for the 1099-k and in a minute we’re going to talk about the 1099 nec and the crazy state requirements that are now um being required and that’s all listed out there as well on uh on the entire state section so you just go to the state section click on your state and then read the information that’s related to your state from there


so there’s a thing that’s kind of called the eyeball test it’s a specific regulation from the irs that provides certain instances where when an eyeball test can be applied to determine that a payee is exempt from 1099 reporting so absent actual knowledge otherwise they pay or may treat a payee as a corporation and therefore as an exempt recipient if one of the requirements are met below the name of the payee contains an unambiguous expression of corporate status that is inc incorporated corporation corp or pc um you have to make sure that it’s a domestic inc corporation corp or pc so that’s and we’ll talk about that in just a second that’s an important distinction but you have to know that it’s a u.s corporation at that point in time and then they you can tell that at that point that they are not required to receive a 1099 form from you um in most cases obviously corporations at times have a responsibility to get a 1099 sent to them we think it’s this is good for governments and non-profits we just think that there’s some risk with corporations so you know if you can get a w-9 up front get it signed get it to you that is the best practice it eliminates all risk if you’re you know it’s january 31st and you’re trying to get your 1099s out then you can go through and use this eyeball test and eliminate those corporations but best practices to actually get the w9 up front for a couple reasons the main reason is that um it could be a foreign corporation and so they have different rules around the w8 and the 8233 and especially around fatca so if you’re making any type of payment from lending and investing activities uh cash value of insurance contracts and annuities to a corporation insurance company financial institution brokers swap dealers nominees and custodians there is a presumption that when you make those kind of payments that this is a foreign vendor and you have to withhold 30 percent you know same kind of thing the 24 there’s backup withholding for us corporations this is like a a factual withholding of 30 percent that has to be withheld and the 1042 s form has to be issued at that point in time so you know if you’re going to use the eyeball test make sure that you know that they are a domestic corporation and that you’re not making any fatca payments at that point in time again best practice is just get in your system automatically send a aw nine and we connect to zero in quickbooks every time you have a vendor automatically sends out a w9 form automatically sends out four requirements you know we recommend you just get a w9 form to cover all of your bases at that point in time all right quick check on questions here um


in reference to the credit and debit card side if we use a third party virtual card vendor for payments do they issue the 1099 k typically if it’s a


credit card where there is some kind of obligation with the company to settle that you know you look at a credit card you know you are extending your credit they’re ensuring that the other person will get paid whether the other you know the party making the payment makes the payment or not um those kind of issues you know paypal does very similar things where they work through that they guarantee payment and then they work on the other side you know when you have those kind of um third-party network type uh companies that are involved in that that’s when it’s not reportable when you’re just moving money from one to the other and it doesn’t move unless the money’s in the account that’s when you actually have to issue a 1099 form


so we transfer money to this vendor via ach so if you are transferring money to a vendor via ach that is definitely 1099 reportable i mean obviously assuming the payment that you’re making is reportable and the tax classification of your your of your vendor is reportable but um payments by ach are definitely reportable


a couple other things about non-reportable payments our limited liability company is considered a corporation we’ve talked about that already no initially unless they file one of the two specific forms and the irs accepts it then they’re treated as a corporation s corporations are considered corporations so you’ve got the regular c corp s corp llc that’s filed to be a c corp and llc is filed to be an s corp they’re all treated as corporations so when you read in the regulations the corporations are exempt from getting a 1099 form that applies to all of those now most payments to corporations are not reportable but there are some exceptions medical and healthcare payments are still on box 1099 miss box six attorneys fees so these are fees that are paid in the normal course your business you know hey i got a question about this contract or i got a question about this employee or this regulation or whatever that’s all going to go through the 1099 nec box one gross proceeds paid to an attorney this is usually related to settlements that’s going to be 1099 bucks so miss box 10 fish purchases which you probably don’t deal with but that’s box one of the 1099 nec and there’s a couple other ones that are there as well and then we’ve got a bunch of other non-reportable payments sorry reportable payments to corporations before you can say hey this corporation is exempt so um brokers and barter exchanges money lending businesses payment card which we’ve just talked about uh cancellation of debt and brokers if you are in a an executive branch of the government of the us government you have to issue a 1099 to all of your corporations there are no exemptions for you so just as a heads up for that if you’re an executive branch of the us government


so then that was what we just talked about that was when a government was making a payment this is if you’re making a payment to a government any payment to governments are not reportable that’s going to include your state government district of columbia u.s possessions and foreign governments and that includes any of the related agencies or instrumentalities of each entity from there so you’ve got your county offices you’ve got your state you’ve got all your agencies of the state and all your agencies of the gov of the u.s government all of those are not reportable also tax exempt entities are not reportable so it’s important to know this means these are tax exempt entities and typically these are non-profits that you’re dealing with you know your churches or your red cross or your salvation army or some of those what’s important to note is some of these lose their tax exempt status and are now reportable so there is a search that we recommend that you use that the irs gives you and we’ve got there the tax exempt organization search just to make sure that when you have a non-profit that they are still tax exempt and then this also applies to tax exempt trusts like iras hsas etc


all right i’m going to hurry along here we have to skip the questions lots to get to still uh employee payments obviously employee payments are almost always reported on a w-2 um so make sure that when you’re looking at that um that you’re making sure that you’re not making payments to employees and reporting those on a 1099. and the customer refunds in these situations the refund of a customer overpayment is not 1099 reportable it’s just a reduction of what the customer paid you of your income that you received um real quick which of the following payments is not reportable on a 1099 form and it is going to be all of the above merchandiser goods telephone services and freight


all right let’s talk about 1099s the brand new 1099 nec which stands for non-employee compensation so this was actually a form that was that we had last seen in 1982 so it’s been a long time michael jackson released the thriller commodore 64 8-bit computer it was launched which is sad because i actually had a commodore 64 8-bit computer uh the dow jones industrial average closed at 1046. we’re now at 30 000. just crazy 30 times uh where we were at that time ronald reagan was president e.t the extraterrestrial was the number one movie after 1982 the form was replaced with the all-encompassing form 1099 miss they’ve kind of gone back to the 1099 nec because the deadlines for the nec they want they want everything related to the 1099 nec to them you know submitted to them and sent to the contractors or vendors by january 31st or this year it’s it’s february 1st um and that was causing issues because some of the boxes on the 1099 miss weren’t due until later and there was all this confusion with with um people filing 1099 miscellaneous late with nec on it and they were finally you know they’re getting penalties and so they just kind of separated out really around the deadline issues that they were having so effective for calendar year so these are for payments that you made in 2020. the deadline is filing for this is january well it’s february 1st


2021 non-employee compensation will no longer be on the 1099 miss in box seven the nec will be non-employee compensation will now be reported on the 1099 nec box one so you can see it right here we’ve got the box one right here and then that’s it there’s federal income tax withheld here and state income tax will held down here but basically it’s one box on the 1099 nec and that is for we’ll talk about what non-employee compensation is it’s basically services provided by independent contractors and vendors


next slide so what is it there are four conditions that have to be met you must generally report a payment as nec if you’ve made it to a non-employee so the payment is to someone who’s not your employee so it’s a person or a company corporation whatever like i mean all the corporations are typically exempt um services you paid made the payment for services in the course of your trade or business including payments made by government agencies and non-profit organizations you made it to a individual partnership llc tax as a partnership estate or in some cases a corporation so it’s a reportable entity and you made the payment of at least 600 or more during the year


the form 1099 nec is generally for services like we talked about non-employee compensation or generally services that that are provided to you and a payment for services is typically labor that’s performed directly by another person examples include accountants doctors lawyers painters and independent contractors and unlike tangible goods services cannot be shipped and instantly consumed as provided or are instantly consumed as provided services also include transportation education software as a service and similar services even though the service is not a per hour labor charge we’ve got the same kind of thing here that we had with the irs regulation that we talked about earlier around merchant categories this is kind of really helpful here because sometimes services are actually difficult to parse through and understand and they’ve listed this out these merchandise categories that they said that accounting and bookkeeping services airlines car rentals caterers country clubs employment temp agencies and exterminating services are all reportable on a 1099 in this case now it’s 1099 nec and on some additional ones i pulled out equipment rental hotels motels and resorts landscaping services parking lots and garages political organizations taxi cabs limousines travel agencies and tour operators now hotels and motels and resorts and it depends whether you’re getting a service there or if you’re just renting a room or a conference room that would be considered rent at that point in time i actually need to update that just a little bit so the new 1099 miss you can see that new for calendar year 2020 again to be filed by the end of january february 1st box 7 will no longer be for services or no non-employee compensation effective for calendar year 2020 to be filed in january 2021. uh box seven you can see now is direct sales of 5000 or more has been moved to box seven so that would just be a check box at that point in time box nine is now crop insurance proceeds proceeds box 10 for gross proceeds box 12. now for section 409 a deferrals and box 14 for non-qualified deferred compensation boxes 15a and 15b have been removed i’ve also put a couple links here to some really helpful instructions from the irs on generally filing a 1099 as well as specifically relating to the 1099 miscellaneous nec forms so you can take a look at that to go a little bit more in depth if you have additional questions from there


now from a filing perspective you are currently required to file 250 if you have 250 or more information returns during the year you must file those electronically and this 250 or more requirement applies separately to each type of form so for example if you have to file 500 1098s and 100 to 989 nec’s you must file the 1099 to 98s electronically but you’re not required to file the form 1099 nec electronically because you only had 100 of those one other thing that to make a note if you make personal payments to someone to mow your yard or babysit your kids it’s not reportable so the 1099 miscellaneous the 1099 nec only relates to the business you have to be in the normal course of your trade or business before that applies not anything that’s done on a personal


basis couple things about the 1099 miss boxes you still got box number one for rent this is real estate rentals paid for office space machine rentals um like a bulldozer writing a bulldozer or a copy machine fax uh box number two is for royalties it’s still the same that’s been the way it’s been tonight i missed for years uh anything that’s greater than or equal to ten dollars has to be reported on the 1099 miss box 2 for royalties box number three if you are in doubt and you can’t find where something needs to go um you can always file it on box number three so you know it’s not on the 1099 nec because it’s not not it’s not related to non-employee compensation you know and you just don’t know where to put you can’t find it that certain spot then box three is kind of like that catch-all for you at that point in time it also includes includes prizes and awards that are not for services performed um reportable income of 600 or more not reported in one of the other boxes which we just talked about uh amounts paid to a winner of a sweepstakes not involving a wager and then generally all punitive damages any damages for non-physical injuries or sickness and any other taxable damages at that point in time


all right just let me see if any other questions here


are payments to accountants and cpas reportable


so it would depend on yes they they provide a service so it’s a reportable service that’s reportable and that would most of the time i can’t i’m trying to think of a case where you would buy maybe you buy some 1099 forms from them that would not be reportable but in general 99 of the the fees that you pay to a cpa or accountant are reportable on a 1099 nec you know unless of course they’ve created a corporation and so that corporation you know is now corporations are not you don’t have to report services paid to a corporation or accountants and cpa services are not reportable to a corporation so you need to take a look at the the tax classification of the cpa or accounting firm at that point in time a lot of cpas and accounts are partnerships and so a lot of times though their partnerships are almost always reportable for services


okay box for this is if you have any backup withholding so if you’ve withhold held something they didn’t provide you a 1090 they didn’t provide you a w-9 form and so you had to back up with hold 24 this is where you would put the 24 that you back and withheld in box number four box number six medical and healthcare payments payments made to physicians or other providers of medical or healthcare services uh corporations here are not exempt same thing for llcc llcs and s corporations that are not exempt so if you pay them for medical services you have to issue them at 1099 miscellaneous payments for prescription drugs are not reportable because you’re buying a good at that point in time


all right attorney fees versus gross proceeds so attorney fees these are attorney fees paid for services in the normal course of your business this is the term attorney includes a law firm or other provider of legal services um you know you’re just paying them a general you know general services provided by your attorney with questions about the law this is would be would be


put on form 1099 nec box one it’s considered non-employee compensation assuming um that well most of the time an attorney is a reportable uh entity at that point time you know they’re not gonna be a non-profit or a government so and corporations are uh not exempt here so you’ve gotta issue them at this point in time gross proceeds these are payments to an attorney but not for the attorney’s services gross proceeds are typically settlement agreements that are paid out of a court case the exemption for corporations here does not apply either to gross proceeds and they are reported on box 1099 miscellaneous box 10 which is a new box which is kind of strange because it’s been box 14 forever but it is now box 10 on the 1099


miscellaneous all right now we get to the tricky part of the 1099 nec and the havoc that it’s reeked


so generally in the past you would file your 1099s with the irs and then they with about 30 states we’ll talk about that in just a minute would uh if it’s one of the forms below to 99 b the 1099 div the g the int and the miscellaneous was the big one when you filed with the irs they would then turn around and send that information to the states and so you didn’t a lot of states you didn’t have to file the 1099 miscellaneous because the federal government would do that for you that’s called the combined federal state filing program so it was established to simplify information return filing for all payers the issue was that the irs updated publication 1220 where this is talked about in september of 2020 and did not include form 1099 nec so that was going to mean that the states all these states were not going to get all this information related to services which is one of the biggest things that’s reported on the 1099 miscellaneous are services or non-employee compensation so they have all started requiring reporting of the 1099 nec let’s first talk about the 1099 miscellaneous so the 1099 miscellaneous is still part of the consolidated federal state filing program when you send your 1099 miscellaneous to the irs they’re going to send it to those states at the top these states are in the combined federal state filing program and there’s a couple ones that have some additional stars because just because they’re in the program doesn’t mean they don’t necessarily have their own requirements the ones that are starred you need to look into those states a little bit more closely the other thing i would say is that this stuff is changing so fast that i would stay on top of your state where you file and look at their specific laws and if you go to our website under the academy and your state you’ll see information that go to the links of your state and check it out and see what they have to do and we’re trying to keep that updated as well so you can see what what’s required what’s not


there are some states that are not in the combined federal state filing program in those states you have to file now again we’re talking about the 1099 miscellaneous form here in these states you have to file that form directly except for a couple of states where there is no filing requirement one of the things that we’re seeing though that as these states start to look at the 1099 nec they’re starting to look at the 1099 miscellaneous form as well and they’re starting to add additional requirements at the state level for 1099 miscellaneous filing so just take make sure you take a very very close look at your state before you file your 1099s this year and we do we have a partnership with uh tax to e-file that does the 1099 filing for us for our customers they basically use our site they key in all the information to get all the w9s export out a report of just the reportable vendors the key in the dollar amounts and import that exact spreadsheet into tax to e-file they will handle the majority of state filing for you automatically for an additional fee there are also states that have no income tax and no filing requirement you can see there alaska florida nevada et cetera because the 1099 is basically a big brother looking over you to make sure that you report all of your income on your individual tax return for yourself as a person or a company if there is no income tax then there’s no need for the 1099. so those states are great states to be living in because you don’t have to worry about the state changes if you’re doing business there


you do need to be aware of payments that you’re making to residents of let’s say you’re in texas but you’re making payments to residents of say oklahoma or whatnot i don’t know the exact rules off the top of my head but oklahoma may have 1099 filing requirements for payments made to residents of their state even if you’re in texas so you got to make sure that you look at where you’re making the payments to as well as you go through this process so this is a quick list that we put together of state reporting requirements that are changing like i said by the by the hour almost so arkansas now requires a 1099 nec if you file in arkansas that if it’s greater than or equal to twenty five hundred dollars then you’ve gotta file with the state dc is greater than or equal to six hundred dollars um you know the delaware kansas those are reported to the irs so that’s fine you’re good to go with the irs at that point in time hawaii you’ve got to file by paper which is crazy and then so you’ve got all these different regulations you can see all that at that point in time in addition there are some of the states required only if you withhold only if you have backup of holding in some of these states are you required so you may not have to file if you’re not doing any backup withholding in some of those states but actually makes it pretty easy because most companies avoid packing with holding like the plague and make sure they get a w-9 form up front so uh you know like we’re in georgia so in georgia we would be good we don’t we don’t do any backup of holding we get a w9 up front before we make any payments so at the end of the year we will only have to file at the federal level you will not have to file in georgia because we have no withholding at that point in time colorado says that they accept the 1099 nec so we don’t quite know what that means yet that they accept it so that may mean that that you need to file in the state of colorado so there’s still some some uh vague regulations that are still coming out on some of this stuff which is crazy because it’s already it’s in january at this point time so


all right


next sending 1099 forms electronically if you’re required to send a 1099 statement to a recipient so that’s you have to send a 1099 to the recipient then you may be able to furnish the electron the statement electronically instead of on paper so there is a process if you want to send your 1099s electronically to your vendors and not send them something by paper in the mail you can do that but you have to follow the irs’s regulations around this process the the recipient must consent in the affirmative to receiving the statement electronically and not withdrawing that consent before the statement is furnished so it’s very detailed on what you have to do it only applies to those forms and that’s interesting i have not looked at that but just thinking about the 1099 nec i need to take a look at that and make sure that that applies that’s a new question i not thought about but anyways the consent statement must include the following it’s very detailed so there’s some instructions there around publication 1179 about how you have to go through that process i say this because when you go to file your 1099s just be aware that you have to mail them out to your vendors unless you have this consent on file from your vendors and you follow the irs regulations for that so just be aware that all you know 1099 companies or processors will allow you just to send out a electronic w9 like hey that’s really cool i can do that but just be aware that you have to have the consent in place before you can do that


check see if any other questions here


all right let me read this and see our tribe distributes assistance payments to our elders some are 500 300 we also issue monies for miscellaneous things such as turning 18 and graduating school so i would think that that would be reportable but you need to take a look and see if it’s if the aggregate so you have to add all that up for the year is over 600 so i have not i’m trying to think through on assistance payments on that um if i’ve seen any type of exemptions on that i have not seen any exemptions on that i will try to take a look at that and send out a an updated response a little more research on that when i send out the slides the webinar tomorrow the next day but in general i think that that would be reportable uh one one note that i want to say is as you’re going through these things and you’re not sure whether something’s reportable there is no penalty for you to issue a 1099 to your vendors it doesn’t change their tax liability at all they still owe the same amount of tax whether you issue them a 1099 or not because they’re responsible for adding up all the payments they’ve received and determining whether it’s reportable or not to the irs and whether they have to pay tax on it or not so it doesn’t really change anything by issuing a 1099 form uh it leaves alleviates you of a tremendous amount of penalties potential penalties and interest from the irs if you do it wrong so we always recommend like if you don’t know with a report then report send a 1099 out there’s no issues with that at all you could send you could basically send a 1099 out to every person you made a payment to just call it a day now vendors don’t necessarily always like that and it can cause some issues but in general if you’ve got four or five or six or ten or whatever that you don’t really know just fill out the 1099 if you can’t figure it out and send out the 10.99 another question here rent for office space paid by an s corp or a partnership paid to another s-corp or partnership does it go on a 1099 miscellaneous so um rent for an office space paid so it doesn’t matter who is paid by necessarily unless it was an executive agency um rent for an office space paid to another s corp or partnership so if you’re paying an s corporation rent that would not be reportable because an s corporation is exempt in most cases you know the two big ones are medical and attorney fees if you’re paying a partnership that is going to be reportable because a you know let’s step back there’s two pieces to this is the payment that you make reportable and is the payee that you’re paying of the vendor a reportable entity so rent is reportable so when you make rent that’s a reportable payment but it has to go to a reportable payee in order to be reportable on a 1099 form so rent is reportable when you’re paying an s corporation that is not reportable so because the entities one if one of those two is not reportable then you don’t have to issue a 1099 form so because rent is reportable but an s corp is not reportable you don’t have to issue a 1099 form if rent is reportable and the partnership is reportable then you have to issue a 1099 form so when you look at your 1099s think about that is the payment i made is there a reportable payment and is the entity i’m paying are they a reportable entity if both of those are yes then a 1099 is uh is required at that point in time would we have to file both a 1099 nec and a 1099 miscellaneous if we paid a cash christmas bonus to our mechanic so no when you are making payments for services you would only have to fill out the 1099 nec form you do not have to fill out the 1099 miscellaneous form so there’s only there are very rare rare rare cases where you have to do both um but the 1099 in this case that would just be the 1099 nec that you have to uh file at that point in time and make sure it’s over six hundred dollars if it’s under six hundred dollars that you paid your mechanic through the year um then you don’t have to to do that and it would depend again you know you may be paying the auto shop for the repairs and maybe just gave the mechanic as an individual a payment a christmas bonus if that was under six hundred dollars and you didn’t make any other payments that individual as a mechanic then you would not have to report that because that’s under six hundred dollars


okay corrections sometimes even with the best process an error can be made on a 1099 form and there are two general types of errors with two methods required by the irs to correct error type number one it’s an incorrect amount code or checkbox or a 1099 was filed in error this is the case prepare a new form enter x in the corrected box fill out all the information and correct the error so if you have the if you have an incorrect amount fill out the w9 for the 1099 form put an x in the correct box and put the correct amount in uh that box if you filed it in air fill all the information and just put zero in the box that had the dollar amount previously error type number two this case you had no pay e10 incorrect 10 incorrect payee name or the wrong 1099 form was filed in this case you have to file two 1099 forms you have the initial you have to you have to issue the initial form exactly as it was done but with zero for all the amounts and enter x in the corrected box then you have to prepare the corrected form do not enter x in the correct box and put all the uh the correct information in that form at that point in time so just note again that you got two returns that you are required in that error type to correct now one thing that’s unique to this year is if you are correcting a 1099 miscellaneous form from last year from from calendar year tax year 2019 the irs requires that the correction be submitted using the prior year form so don’t use a 1099 nec to correct something that was issued to your vendor on a 1099 miss box 7 last year you just use a 1099 miss box 7 with the form from last year and submit that correction


all right a couple couple just side notes which are interesting to know in in july 1st of 2019 the congress signed the taxpayer first act as part of that act they are lowering the electronic filing threshold so for next year for calendar year 2021 you must file electronically your 1099s electronically if you have 100 returns or more and then in the calendar year 2022 if you file 10 returns or more 10 1099s or more in calendar year 2022 you’re going to have to file electronically so just be aware that that there’s going to be a big push moving toward everything going electronic uh partnerships are already moving down partnerships are already at if you’re a partnership and you’re filing 1099 forms you have to do your your threshold is already at a hundred no i’m sorry i take that back there was an exception to that they have not moved that role they’re still at 250 i just read that the other day so we’ll see if they go down everybody’s still at 250 uh but their intent is to drop this down over the upcoming years


they also are looking to do an online platform a new 1099 online platform likely created by january 1st 2023 they’re going to prepare 1099 forums to distribute to the recipients other than the irs maintain a record that completed filed and distributed form 1099s um that that sounded like a really good idea at first until we had all these states coming online like we got like 30 states now they’re requiring some sort of uh local filing uh in the state so it would be to see how that how that works at that point time with these states because the states are the complex part you’re in more than one state that is the complex part for you at this point time is is finding those states


all right which one of the following is reportable on the new 1099 nec


so which of the following is reportable on the new 1099 nec payment for non-employee compensation a credit card payment to a freelancer for services payments to tax exempt non-profit or none of the above


which of the following is reportable it’s going to be non-employee compensation of course that’s the name of the form credit card payments are handled by the merchant provider they issue a 1099-k payments to tax exempt non-profits are um tax-exempt so they don’t have to have a 1099 issue to them


all right a question here information on 1099-g related to corporations are they exempt um you might need to give me a little more information on that are you the government entity that’s issuing the 1099-g looking to see if you have to issue those to corporations or are you receiving a 1099-g


all right look for your answer there next we’re going to talk about b notices or missing uh well this was is for missing tens in this case so what happens is you file your 1099s and then the irs runs all their checks on their 1099s and they find errors you know maybe you issued a 1099 with no 10. maybe you issued a 1099 with less than nine digits for the tin number maybe you put a letter in the tin uh there’s things that are missing are obviously not correct the iris is gonna pop that out they’re gonna send you an error notice it’s called a cp 2100 notice at that point in time they’re going to require you to take certain actions and that’s why this is important to run tin matching up front to make sure that your name and the 10 match or at least in this case that you have a 10 and the 10 is correct and this avoids all of these the things we’re going to talk about here around this b notice process and the action here is when you receive an error notice that relates to one of these kind of things you’re going to begin back and withholding on any reportable payments made and continue until a tin is received do not send the first or second b notices in response report amounts withheld on 9 45 according to the deposit schedule and then you have to make up to three solicitations these are the annual solicitations for the ten


and then we have a flow chart here that kind of walks you through that process which is actually to be honest pretty helpful in the way that the irs walks you through that because it can be complex at times when you’re doing the the b notice process and we’re not going to necessarily go through that specific process here the second thing that you can get benos is for are incorrect tins so you know you issued a ten it was nine digits um there wasn’t there wasn’t any letters in it it was correct i mean it wasn’t correct but it was it looked correct we’ll put it that way however the name and the tin combination is incorrect if it can’t be found in the irs or social security administration files so the irs is going to send you a notice back on this and this is the real place that tin matching helps you avoid these notices it’s by making sure that the 10 you correct these before you file your 1099 forms and the action required here is if you agree basically when you get it back and the irs says hey these don’t match and if you agree if in your records you agree with the name and tin combination um you need to determine whether this is the first or second time within three calendar years that you’ve received a notice so this is all fun stuff from the irs it’s the first or second time within three counter years that the newest was received there are different steps you have to take on whether it was the first notice or the second notice and you need to follow the b notice


steps so a b notice is basically a backup of holding notes that you send your payee when there’s a discrepancy between their name and tin on a 1099 um and the irs will tell you that with this cp 2100 notice and you have two responsibilities if it’s the first notice that you’ve received within three calendar years you must send the first b notice and a form w-9 to the payee after you receive the first cp 2100 or 2100a notice from the irs and ask them to solicit that and correct the name or 10 combination if it’s the second b notice that you’ve received within a three year period you must send the payee after you receive that notice what’s called the second b notice this tells the payee to contact the irs or the social security administration to obtain the correct name and tin combination so note that payees payers are responsible to track how many notices are received and in this case there’s this whole extra process now that your vendor has to go through to validate and prove their tin to you and on a side note the cp 2100 is sent to large and mid-sized filers cp2100a is sent to smaller filers


so in this one the tin number on a 1099 was not correct so the name intent combination is incorrect but it’s not match they’re not going to be found so we’re still in the same kind of process so you’ve sent out those notices um now and we what we just talked about was where your records agree with it so when you got it back the name and tin that you submitted was the name intent in your files so you’re like hey that’s what i submitted that’s all correct everything’s good um we match so now you have to file both those first and second b notices and this one if you disagree like if you get it back and your records disagree with the irs they come back and they say hey you know you submitted this name and this 10 and your record you’re like oh you know the name intent i have is different we actually had an issue with that uh the last company i worked at for some reason the person that was submitting we did 10 matching and everything when they when they keyed in the 1099 forms they keyed in the wrong tin numbers so we got like 50 b notices back but they were all they were they none of a match to our records we had the right tin number in our records but for some reason we submitted the wrong tin to the irs i have no idea until it was a temporary person that was helping us with that i still have no idea to this day how 50 of those got submitted incorrectly so maybe i made her mad i don’t know but uh anyways we got those back and when it when it disagrees then you don’t have to send a b notice you don’t have to send the correction to the irs and you don’t have to do anything just to make sure you get done correctly the following year so it’s kind of weird you would think hey i just submitted 50 1099s that were wrong i should correct that with the irs but the irs says no you don’t have to correct that


now it doesn’t mean that you still can’t receive penalties and interest for submitting 1099’s that were wrong but you don’t have to correct that at that point in time and here we’ve got the flow chart around b notices when the tin name and the tin number are incorrect at that point in time so you can see it gets quite extensive at that point in time so again i know i’m a broken record here but make sure you 10 match before you send your 1099s and you eliminate like 99 of the odds of getting these b notices back from the irs


all right um i will look you know i don’t deal a whole lot with this is the question i’m sorry i’m looking at the other screen here information on 1099g our corporations exempt i i believe that they are i will take a look at that and get back to you on that specifically because i don’t deal with government payments typically my understanding that is unless you’re an executive agency when you’re an executive agency making payments to um your vendors at that point in time um you have to you corporations are not exempt uh for the 1099g i need to take a look at that i will respond back to you on that and uh and let you know a little bit more about that since i don’t deal with that um every day


so i’ve got another question here on uh what falls under other income on the 1099 miscellaneous uh form let me um i’m gonna


well let’s get let’s let me come back to let me finish up the due dates here and we’ll come back to that question because i want to i want to click back of that slide real quick and address that so um


but i want to make sure we get the due dates and penalties for sure


so for calendar year 2020 and these are for 1099 forms these are the due dates uh for the forms so you need to send for the recipient a copy this is the copy that you mail to your vendor or your independent contractor for the 1099 miscellaneous and nec you have to mail copy b of the 1099 to your vendors by you have to be postmarked by february 1st 2021 unless the reporting payments in 1099 miscellaneous are only for box 8 and 10. so if you have a 1099 miscellaneous that only has box 8 or 10 then you can mail it out by february 16th that’s the deadline for those but for the majority 99.9 percent of the companies that are out there that are mailing stuff out you’re gonna have to it’s due by february first now these are what they call statements or 1099 copies copy b sent to your vendors or independent contractors due by february 1st now filing to the irs the 1099 nec and you can see it here is due to the irs on february 1st as well the irs wants to get all the information related to services paid to independent contractors and vendors by february 1st and they want it mailed out to the independent contractors and vendors by february 1st the main reason for that is they are looking for fraud with issuing refunds they don’t want to issue the refunds which can happen right after february 1st they don’t want to have to they want to add that information in so they can validate the refunds before they issue them and send them out to the taxpayer the 1099 miscellaneous form is due by march 1st if you’re filing on paper and if you’re filing by electronic means it’s due by march 31st one of the things that that’s helpful in waiting sometimes that we used to do and it’s gonna be less helpful now because the majority of what you’re gonna do is gonna be on the 1099 nec um is that we would file an automatic 30-day extension and then we would file our our irs electronically you know like a month later and that in case something happened or we had an error we had to correct we had to send out a new 1099 or whatever then we would just um send it out at a later point time um and and then when we sorry let me back up we would mail that and correct that with our vendor our independent contractor and then when we sent it to the irs there was no correction needed with the irs so it gave us you know a month to actually work through all that and make sure everything is correct and then we would submit that and that helps you avoid some penalties because there are penalties um on not only the 1099s that you issue to or send to your vendors independent contractors there are also penalties if you do it wrong with the irs we’ll talk about that in just a minute however for the nec you can no longer have a 30-day extension it’s no longer good for the 1099 nec anymore um so it’s uh it’s lost a lot of its value at this point in time


so penalties are for late filing yeah so we remember we talked about backup withholding before which was 24 now we’re talking about filing on time so these are timely filing um the penalties are are assessed for late filing or a miscellaneous a missingtin or an incorrect tin um they are assessed on a per 1099 basis and it’s it’s double it’s not just for each vendor that you issue 10999 for it’s also to the irs so if you file late with the irs and you file late to your vendor now you have if it’s within 30 days you have a 50 penalty for the late fee going to the irs and a 50 penalty for the statement that was mailed a 1099 statement that was mailed late to your vendor so it’s a hundred dollars per 1099 that you file away because most of the time you file late you’re finally late with the irs and you know uh your vendor so just watch that make sure you understand that it’s actually double if you do it wrong and then it goes up substantially if it’s you know 31 days to august first it’s now 110 dollars per return which is double which is 220 per 10.99 which is crazy um the irs is is has gone crazy on this stuff um if they find out you’ve intentionally done it then they’re gonna charge you 560 times two uh 1120 1 120 for every 1099 that was intentionally not filed so they are serious about this they also issued a they put together a brand new task force in the summer of 2019 to pick off things that were like the low hanging fruit so for instance if you file a 1099 and you have no 10 or it’s an obvious mistake on the 10 then they’re going to come back to you and say hey where’s the back of holding on this we want to see the 24 and if they can’t get you know if the the the vendor or independent contract you paid didn’t pay their taxes because you didn’t send them a 1099 that responsibility could now land on you for that which is which is crazy


review question number six what is the best when this is our uh let me guess our this is our last question what is the best way to avoid a backup withholding penalty so you can file 1099’s with the irs by january 31st you can make sure you haven’t paid any disregarded entities you can collect a w9 on every vendor prior to the first payment and you can withhold 24 on every vendor payment so what is the best way to avoid a backup withholding penalty and the answer to that is collect a w-9 on every vendor prior to the first payment filing 1099’s with the irs by january 31st does not avoid backup withholding penalties it helps you avoid late filing penalties make sure you haven’t paid any disregarded entities well of course you want to do business with the vendors that you need in your business that really is not really the best way to avoid backup withholding plus it doesn’t deal with all the other entities and individuals that you pay and then withholding 24 on every vendor payment i mean that might work but that’s certainly not the best way or the easiest way to do that so that is the end of the webinar thank you i know it was a long webinar with a lot of information um looks like most of you guys stuck with uh me today so i appreciate that i will answer a couple questions here i’m gonna go back and answer this other income question but if you have questions during your 1099 process feel free to you know shoot me an email at john w9manager.com i try to answer the chat on our website as much as possible and then you can always visit our website at w9imanager.com click on the academy tab and there’s a lot of information there about filing 1099s and dealing with w9 forms so i i appreciate that


let me answer your question now i had a question here from anna about i’m not clear what falls under other income i’ve tried to look it up but i keep getting confused so let me let me just step back to that slide give me one minute i’ll find the slide for that we can chat about that


all right thank you guys for the uh for all the kind notes um as you are uh some of you guys are headed off so um i’m gonna look up one thing here as well just to give you some additional information on the form so you can see here that in box three um we’ve got uh just give me one second here um


i try to uh get you some additional information here


so i’m just looking up so one of the only good places you can go to look for information is on the instructions for forms 1099 miscellaneous and 1099 nec and there’s a um i’ll just bring this over for you so you can see it actually i believe you should be able to see that you can see in this these instructions that they give you under box three they give you a lot of different things that go into box three and so you can kind of take a look at that there and see what goes in there in general when you there are a lot of very specific things that go into box one for rents box two for royalties you know box six for health care you got the 1099 nec you know in general this is kind of the catch-all if you don’t find something somewhere else in a different box and you can’t find out where it goes box 3 is a great place to put it if you can’t find it in one of the other boxes and you can see that it says it right here enter the other income of 600 or more required to be reported on form 1099 miscellaneous that is not reportable in one of the other boxes on the form so that’s in general what’s included in there but it’s also got some other things on here payments is explained done earlier deceased employee wages indian gaming profits and payments to tribal members oh that’s that’s actually really good right there because uh we had that question earlier uh from the person making tribal payments to members which i had learned something new today that’s in box three i would have thought that was nec um actually let’s go back and look and make sure that we are yep that’s the miscellaneous that we’re talking about here so they have some very specific things that they’ve got here they’ve got all these punitive damages in uh for non-physical injuries or sickness or any other taxable damages are included here so they have some very specific things that are laid out in other income and then it’s the catch-all if it’s not listed out specifically somewhere else or doesn’t make sense somewhere else then it would go in box three of the tonight in miscellaneous form so hope that helped


excuse me all right let’s do another any other questions here um hi john can you send a copy of the slides to my email yes i will be sending out if you registered for this which in order to get in you had to register i will be sending out copies of the slides and the a link to youtube i believe or our academy to take a look at the webinar


all right any other questions that we’ve got for this today around 1099s or miscellaneous or nec or best practices just give me a minute to answer any or putting other questions out there


other than that i appreciate it thank you for your time and attention i wish you the best of luck at getting all this stuff taken care of and uh you know if you have some time we certainly appreciate you checking out w9 manager as a way to help you automate your w9 1099 process so we’re only going to continue to get better and make it easier and easier so we’re excited about where we’re at with that we appreciate it

Why do I need to fill out a W-9 form?

Hi, I’m John Croyle, the founder of W9manager. In today’s video we will be answering the question, “Why do I need to fill out a W-9 form?

The first thing to understand is “Why your customer or client is asking for a W-9 form?” Companies that make payments in the normal course of their business are required to report certain payments to both you and the IRS at the end of each calendar year this is typically done using Form 1099 and the IRS calls this requirement “Information Reporting” and the  process is similar to the way that employers report wages paid to employees on Form W-2.

When the payment for a product or service is required to be reported to the IRS on Form 1099 your customer is required to ask you for your Taxpayer Identification Number or TIN. Your unique TIN is the way the IRS identifies you in its records. And a TIN is typically either your personal Social Security Number or an Employer Identification Number or EIN. The IRS compares the payment information reported on Form 1099 to the income that you report on your income tax return. If the income that you report on your tax return does not include all the payments reported on Form 1099s received by the IRS your return could be red-flagged. The IRS could then take steps to determine why all the income earned was not reported and this could result in an audit by the IRS.

So, what is the consequence of not submitting a W-9 form when somebody paying you asked for it? If you do not provide your TIN number to your customer when requested the customer will not be able to specifically report your income on Form 1099. The IRS will then require your customer or client to reduce all the payments made to you moving forward by 24% and remit this amount to the IRS on Form 945. IRS will hold your customer personally responsible for this 24% if they don’t obtain the TIN number or withhold the required amount. Additional penalties and interest could also be assessed in addition to the 24% in backup withholding.

Therefore, most companies put procedures in place to obtain all of their vendors TIN numbers in advance of making any payment. Getting a W-9 form from everyone that they pay is the standard process that the IRS has created for payers to obtain the TIN number. So even though you are not required technically to give your customer a W-9 it is always in your benefit to complete one. Otherwise, your customer will likely be required to withhold 24% from all payments made to you.