How to Properly Track Payments for Forms1099-MISC and 1099-NEC Reporting
It’s not uncommon for 1099-MISC and 1099-NEC preparation to be a frustrating experience for small businesses. The requirements can be complex and confusing, and if you don’t collect the necessary information as the year progresses, it will only add to your stress levels… and possibly result in penalties.
It does not have to be that way. Get things set up correctly in the beginning and follow best-practice procedures to ensure you’re not scrambling in January to get the information needed to file 1099s.
The guidance below is written below for organizations who use QuickBooks Online (QBO), but the concepts apply regardless of accounting software.
- Set up a vendor payment policy. Create and follow an accounting policy that essentially says you will not pay any domestic vendor (non-employee) for services, rents, gross proceeds paid to attorneys (such as settlements) or royalties* by cash, check or electronic funds transfer (EFT) until and unless they provide you a signed Form W-9 first.
- Don’t sweat it if paying with plastic or a payment network. Payments made by credit card, payment card or third-party payment network (such as PayPal), must be reported on Form 1099-K by the payment settlement entity (not by you). No Form W-9 needed.
- Follow the payment policy you just set up… really. It does no good to create the policy if you don’t follow through with it. “Mr. Contractor, you want to be paid in cash, by check or by EFT? No problem… after you’ve provided us a signed Form W-9.”
- Make it easy for your vendors to comply. Okay, filling out a paper Form W-9 and mailing or delivering it to you isn’t that hard, but that smells like procrastination bait for sure. Here’s how you can make it easier for your vendor:
- In QBO, check the “Track payments for 1099” box on the vendor’s record.
- Then go to Payroll>Contractors and click the vendor name.
- Then choose the option to “email your contractor to complete their profile.” Your vendor will be able to provide all information directly online.
- When you get the W-9, update the vendor record. The completed Form W-9 will specify what type of entity your vendor is.
- For each vendor that is not a corporation, make sure the “Track payments for 1099” box on the vendor’s record is checked.
- For each vendor that is a corporation and does not provide legal services, make sure the “Track payments for 1099” box on the vendor’s record is NOT checked.
- For each provider of legal services, make sure the “Track payments for 1099” box on the vendor’s record is checked. It doesn’t matter if the provider is a corporation or not.
- There are a few other exceptions for which a 1099 tracking should be turned on for corporations, but those are less common. See the 1099 instructions for details.
- Use correct categorization on payments. Using the correct category helps ensure accurate 1099’s. Use separate expense categories for nonemployee compensation, rents, legal fees, gross proceeds paid to attorneys (such as settlements) and royalties*. These should each be mapped to different boxes on 1099 forms.
- Don’t ignore backup withholding requirements. If the vendor does not provide you a Form W-9, or if the form indicates the vendor is subject to backup withholding, then you must withhold federal income tax from most payments to the vendor.
- The portion of the payment that is for backup withholding should be coded to a liability account set up specifically for 1099-MISC or 1099-NEC withholding.
- You must remit amounts withheld to the IRS and file Form 945.
Questions? Need help processing 1099-MISC or 1099-NEC forms? Don’t hesitate to reach out to us!
*There are additional types of payments that are reportable on Form 1099-MISC or Form 1099-NEC not covered in this document and not common to SSCPA clients. Please review the 1099 instructions to see if any of those apply to you.