In the first few weeks of January, we get many questions about why we’re requesting W-9s for so many vendors. We hear a lot of “we don’t have any contractors, so we don’t need to file 1099s” but that’s not actually true. In this article, we explain who should receive a 1099, and why we request W-9s.
Who gets a 1099?
People usually equate “contractors” with “an individual we hire to do employee-type work or a specific project, and from whom we did not establish payroll taxes.” When it comes to 1099 filings, these types of contractors are included, but so is every other vendor who provides a service, with a handful of exceptions.
Why does my accountant request so many W-9s?
When preparing 1099s, the preparer first compiles all the service-providing vendors. These are vendors where the expense is classified as (not an all-inclusive list):
- Legal and professional fees
- Accounting services
- Repairs and maintenance
- Contract labor
- Fixed assets and leasehold improvements (evaluated for construction services)
- Casual labor
- Music and entertainers
- PR agency
- Rent and storage
The 1099 preparer then eliminates vendors paid less than $600 for the calendar year from consideration, and requests W-9s for the remaining list. The W-9 provides two things: first, it tells the 1099 preparer about the vendor’s formation status. The vendor’s formation type is important because some formation types are excluded from 1099 filing, as we’ll discuss below. Second, if the vendor does require a 1099, the W-9 provides the information needed to file: the vendor’s TIN and address.
Who does NOT get a 1099?
Determining whether you should issue a 1099 starts with identifying what they provided and is then further defined by their entity formation status. There are three reasons why a vendor/non-employee individual would NOT receive a 1099:
- The vendor provided GOODS. Vendors who provide goods are exempt; vendors who provide services require a 1099.
- For example, if you buy food products or disposables for your restaurant, or supplies to support the kitchen staff, or new uniforms for the front of house, those are purchases exempt from 1099 consideration.
- If you hire a local painter to paint your signage or walls, bring in someone to provide training, have a repairman/handyman come repair or provide maintenance on the building or kitchen equipment, those are services which are included in 1099 consideration.
- This can get tricky for vendors who provided both goods and services, because those expenses must be broken out separately for the most accurate reporting. For example, you hire a local landscaper to manage the topiary in your outdoor dining area. This service is included in 1099 consideration. One visit, the landscaper discovers that half of the plants need replaced after unexpected bad weather. The landscaper agrees to source the new plants and replace them, then bill you for the plants they replaced. The portion of that invoice for the plants alone is for a tangible good and should be excluded when calculating the amount reported on the 1099. The rest is reported on a 1099.
- The vendor is a C-corp. You do not need to file for vendors who are set up as a C-corp, regardless of whether they provided a good or a service. The exception to this exception is legal fees and lawyer’s services: you must issue a 1099 for legal and lawyer payments over $600 in the year regardless of corp status.
- The vendor is an S-corp. Same as a C-corp – this formation type does not need a 1099, regardless of what they provided. Legal fees and lawyer’s services are still reported regardless of formation status.
It is important to not only collect W-9s for all your vendors throughout the year, but to make sure the W-9s that are collected are complete and accurate. If your tax preparer receives a W-9 that does not have a formation type checked, they will take the conservative route and file a 1099 because they cannot confirm that the vendor should be excluded.
Vendors Paid Through Third-Party Processors
Third-party processors like PayPal, Venmo, and credit and debit cards, and some PEOs like Gusto and JustWorks already file 1099s for service provider payments processed through them. So, your tax preparer does NOT need to file those vendor payments. This can create complications when a vendor is paid in different ways throughout the year, because they may end up with more than one 1099 filed from the same customer. How third-party processors, debit/credit cards, and PEOs process 1099s is a separate topic outside the scope of this blog.
Do Interest payments get a 1099?
Interest payments often surprise people. Interest paid on loans, lines of credit, etc that are held by private parties are reportable expenses on a 1099-INT.
Final Comments (title in progress)
When preparing 1099s, it’s almost easier to ask, “who DOESN’T get a 1099?” By starting with all your service-providing vendors, then removing the vendors paid less than $600 in a year, C-corps, and S-corps, and payments made through third-party platforms and credit and debit cards, you’ll produce a complete and accurate 1099 filing.
For specific questions about your 1099s, or about any other accounting or tax topic, fill out this form and schedule a call with us!