If you think your 1099 obligations are on hold until next year, it’s time to brush up on the rules

Even though Form 1099 deadlines occur at the start of busy season, the compressed filing term may cause a lackadaisical approach to completing less critical tasks. It’s challenging to get our clients’ 1099 data within a short period and is stressful for the preparer. With misplaced or missing paperwork, it’s no wonder both parties dread the task.

When it’s all over, everyone breathes a sigh of relief … until next year. But there’s no need to get stuck in a repetitive cycle. You can use the following list with your clients to help you set expectations for compliance work that occurs throughout the year.

Best practices checklist

• Request Form W-9 upon hiring a vendor.
• Never issue payment until you get the form.
• Run a taxpayer identification number (TIN)
• Review for backup withholding issues.
• Keep the form confidential.
• Analyze the tax classification.
• Mark the vendor 1099 trackable in software, if applicable.
• File timely to avoid penalties.

Requesting Form W-9

Form W-9 asks for the taxpayer’s data, similar to Form W-4, but in an abbreviated format. Your client (requester) needs these details to decide if the vendor (recipient) receives Form 1099-NEC or Form 1099-MISC. A vendor refusing to provide the form may be subject to a $50 penalty for each occurrence.

Waiting to issue payment

Without the form, your client cannot meet their tax duties. It puts them in a precarious position, one that is preventable. A vendor that ignores W-9 requests or excuses their delay might also forecast a problematic relationship.

Running a TIN match

The form allows the requester to run a TIN match to confirm the validity of the recipient’s tax details. It also puts the requester on notice when working with a foreign contractor—requiring the recipient to remit a W-8 series form rather than the W-9. The matching process also helps prevent the receipt of CP 2100/2100A notices.

Reviewing backup withholding

Using a vendor without a W-9 leads to 24% backup withholding from each payment and the need to file Form 945, Annual Return of Withheld Federal Income Tax. It also applies when the recipient strikes out Part II Item 2 on Form W-9. The withholding can be lower or higher for a foreign contractor, depending on exemption or treaty status. And if the client does not withhold and remit, they may be responsible for the unpaid tax.

Keeping the form confidential

The client must protect the personally identifiable information they now control. That means taking measures to use secure acquisition and storage methods. For example, depending on their accounting software, the client may request the W-9 inside the platform, rather than rely on less secure email transmissions.

Analyzing the tax classification

You might dismiss the need for a W-9 because an “Inc.” appears in the company name, but that’s a risky move. The name is not always indicative of an entity’s taxable status—an “LLC” may elect the S Corp classification. Only the form will reveal its proper category.

Marking the vendor trackable

Once the client knows the vendor may need Form 1099-NEC/MISC, they can mark the profile 1099 trackable in their accounting program. Then, at year’s end, the accountant or client can generate a report for vendors surpassing the $600 or applicable threshold to make tax time easier.

Filing timely to avoid penalties

It’s costly to skip an information return because of the two-fold filing rule: one form for the vendor and the IRS. A small business’ unfiled 1099s due in 2022 may incur penalties as high as $570 per failure, or $1,140 combined, not to mention the state penalties.

Minimize liability

Failing to get a W-9 presents several problems, including incorrect analysis, backup withholding, and tax liability. The situation also creates more work for the client, taking time away from supporting their business operations. It’s better to replace a non-complying vendor than to continue the working relationship.

When your client is on the hook for the vendor’s tax and hefty penalties, there’s a lot at stake. Reassess your pricing structure, especially if you complete these documents for free. Consider the potential errors and omissions (E&O) costs when setting the fee, including a rise in insurance premiums or non-renewal of the E&O policy.

To dive deeper into this topic, check out “Deducting The Right Way: 1099 Supplemental Guide,” which summarizes the critical components of over 16 IRS publications and forms.