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1099s Are So Misunderstood
Clients understand the receiving of 1099s – they get them in the mail reporting the interest from their bank or brokerage house. But the same form that they receive from those payors is one they have to send the people they pay in the course of their business.
By Guest Blogger Mark B. Zinman, CPA
One topic that I have to discuss over and over again with my clients is the 1099. I now have a standard speech that I give nearly year round. Clients understand the receiving of 1099s – they get 1099s in the mail reporting the interest from their bank or brokerage house, and they never think twice about it. But the same form that they receive from those payors is one they have to send the people they pay in the course of their business.
Where we tend to see the problems with our clients is when they do not realize that the person/business they are paying is eligible to receive a Form 1099. Further, as part of the IRS compliance, every business return — Schedule C, partnership, corporation, etc. — since 2012 contains two questions: Did you pay anyone more than $600 to whom you would be required to issue a Form 1099? And did you issue all required 1099s? If you answer the first question yes and the second question no, I would assume the risk of audit would be greatly increased. Keep in mind that last question does not say, “Did you do almost all of them,” which is where we have our issue with clients. As a paid preparer of tax returns, we are not allowed to sign a tax return for which we know there is either false or misleading information. So, if you indeed did not issue all 1099s, we would only be able to sign the return that answered no to that question.
Employees complete a Form W-4 to indicate exemption and withholding choices, and nonemployees complete a Form W-9. Having each vendor who you are not 100 percent sure is a corporation complete a Form W-9 will provide you with certain valuable information. First, they will give you the correct name of the company/individual and the address for the purpose of issuing them payment. Second, they will sign them. If you use the W-9 as the basis of whether or not you issue a 1099 and use the information on the W-9 to issue the 1099, you cannot be penalized. The only business that you would not obtain a W-9 from would be a business whose name ends in “corporation,” “Inc.,” or “PC.” I would also exempt publicly traded companies, such as PECO, Verizon, and so on. For anyone else, get a W-9. Clients often think that an LLC is a corporation. It is not. The requirement to issue a 1099 for an LLC is based on how they elect to be taxed. If they are taxed as a noncorporation (sole proprietorship/partnership/individual) then you are required to issue them a 1099.
We often scramble at the end of the year to review and obtain the W-9s that our clients are missing. It is always a race against time. Vendors know why you are calling, and they do not call you back. They have no incentive to supply this information accurately or quickly. They will have incentive, though, if they are waiting for a check. We advise all of our clients to obtain a W-9 as they add a new vendor, and to not pay the new vendor until it complies with the W-9 request.
Beyond these basics, there are a lot of exceptions and other issues that may affect who gets a 1099. For instance, because of reporting requirements of third-party merchant services, anyone you pay by credit card is exempt from 1099s. But then there is a host of people and businesses that are often missed:
- Your landlord.
- Contractors who do repairs and maintenance for you. (Often clients know that they are eligible, but since the work was less than $600 they do not need the info. However if called a few times during the year the bills can easily top $600.)
- Attorneys, even if they are corporations, have to receive 1099s.
I know this can be confusing. That is why this is an important topic to discuss with your CPA, and to work together to devise a system that will capture the required information at the start of a relationship with a vendor and not in January when you are scrambling.
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Mark B. Zinman is the managing partner of Zinman & Company PC and specializes in the areas of business management/ consulting and tax planning. Mark is a AICPA and PICPA member and a member of PICPA’s Image Enhancement Committee.
