Navigating 1099s: What Founders Need to Know

1099s are a series of IRS forms used to report the various different types of non-employee compensation. There are over 20 different types of 1099 forms. Chances are you’ve only interacted with a select few of these forms.

In this post, we’ll focus on the most common 1099 forms a startup or small business can expect to file on an annual basis, provide some guidance & insight on how to manage 1099 compliance throughout the year (as opposed to when forms are due!) and provide some examples of reputable platforms that help with the management and compliance of filing 1099s.

Which 1099 forms are most commonly  used by startups or small businesses?

While there are many types of 1099 forms a business may be required to issue, odds are your company will primarily only issue a select few of the 1099 series forms annually. Below is a list of the most likely forms your business will either need to file or can expect to receive each year:

1. 1099-NEC: If you’re using domestic contractors, you should be issuing this common 1099 form. Any contractor or freelancer you contract with that is paid $600 or greater is required to receive a 1099-NEC. Most payroll platforms - that also manage contractor payments - will manage and issue 1099-NECs on behalf of your business. Note: “NEC” stands for “Non-Employee Compensation”.
2. 1099-MISC: Need a lawyer to draft up a contract? Need office space for your return-to-office plan? If you’re paying rent or lawyers & other professional service providers, you should be issuing 1099-MISCs at year-end. The general rule is that working with an LLC necessitates the need to issue a 1099-MISC. Note: Refer to IRS guidance or a professional for final determination due to nuance in deciding what entities require 1099 issuance.
3. 1099-K: Are you an e-commerce business fully utilizing the Stripe platform? Are you accepting payments via any method possible to improve your UX? Check your email for your 1099-K that should be issued to any businesses collecting payments via online providers like Stripe or Paypal.
4. 1099-INT: Just finished a raise and want to take advantage of current money market rates? Experiencing exponential growth and want to earn a little more on your cash flow? Don’t forget to report the interest earned on your cash. Expect to receive a 1099-INT form at year end to report the interest your business earned.

The majority of startups and SMBs will issue 1099-NECs and 1099-MISCs. If you’re using a modern payment platform to manage your contractors, they’ll often handle 1099 compliance & issuance for a small fee.

When should 1099s be prepared and issued?

Think 1099s are a year-end problem to deal with? Trust us, don’t make that mistake! 1099 compliance and management is a process that should start at the beginning of a relationship with a new vendor (and, if following best practices, be reviewed on a regular basis). Too often, compliance and management is an afterthought, often happening in the weeks and days before issuance deadlines. Below are some recommendations for better and timely 1099 management:

1. Request information when the relationship starts: If you’re starting an engagement with a new contractor or professional service provider, you should request to receive a W9 for domestic resources or either a W-8BEN or W-8BEN-E for international resources, with the distinction being whether an individual (W-8BEN) or an entity (W-8BEN-E) is performing the services. International contractors and / or professional service providers are not required to be issued a 1099; regardless, it is recommended and considered best practice to receive completed tax identification forms from international service providers. Bonus points for receiving this tax information before you make your first payment for services rendered. Ensure you get the most important information right: Legal business name / business tax classification / address / business TIN.

2. Store your tax documents: The beauty of the aforementioned tax documents is that they’re a one-time request. W9s or W-8BENs only need to be provided again if and when something on the document changes. Be sure to create a good filing and storage system for the tax documents you do receive.

3. Read the IRS guidance or work with a professional to better understand which resources necessitate a 1099 form being issued: You’re likely on the hook to issue a 1099-NEC or 1099-MISC if:

• You paid $600 or more to an individual or unincorporated business that provides services
• The business is a sole proprietor, partnership or LLC (or has elected to be taxed as such)‍
• You paid rent or made payments to a law firm

4. Maintain accurate payment records: Good bookkeeping and vendor categorization is always a must. For purposes of 1099 issuance, it’s also important to pay attention to & track how you’re paying your vendors. If you use various payment methods, refer to the IRS guidance or a professional to help identify which payment methods require the issuance of a 1099 versus which ones do not. As an example, if you make payments via a credit card or use of a platform like Stripe or PayPal, your business does not need to issue 1099s for payments made using those methods. In those examples, the credit card processor or payment platform would be required to issue a 1099-K.

• Note: If you used multiple methods to pay vendors, only issue a 1099 for the amounts paid via methods that require the business to issue the 1099; for example, if a vendor is paid $1,000 in total via one $500 payment made with cash and a separate $500 payment made via credit card, the business would issue a 1099-NEC for $500 in order to report the cash payment

5. Manage the process throughout the year: Don’t wait until year-end to scramble all of this documentation together at the last second. Not only does it bring on unnecessary stress and increase the risk of untimely and / or error prone 1099 form issuance, it’s also non-compliant. Even if you are able to collect the appropriate vendor tax documentation and issue a 1099 in time to meet 1099 filing deadline requirements, you may still be considered non-compliant in the eyes of the IRS. While there is no written rule that states proper tax documentation is required to be collected prior to vendor payment, it is the IRS expectation. In fact, there is an IRS concept of backup withholding whereby the IRS requires a business to withhold 24% tax on contractor or professional service provider payments if the vendor has failed to provide proper taxpayer documentation. While an audit is unlikely, it is entirely justifiable for the IRS to complete an audit and assess retroactive penalties for non-compliance. Validate vendor tax information throughout the year to go above and beyond recommended vendor management. Bonus points if you review payments - and methods - to vendors on a quarterly basis.

6. File timely and appropriately: Effective 2023 (for 1099s issued in Q1 2024), your business is required to e-file if filing more than 10 total information returns, which include 1099-NEC, 1099-MISC and W2s. See chart below for timing deadlines, by method of issuance.

Note: States may require additional filings; mandatory e-filings effective 2024 for businesses issuing 10+ information returns per year

The most common ways businesses get penalized for 1099 non-compliance are (1) filing late, (2) (accidentally) not filing at all, (3) filing with incorrect or out of date information or (4) filing with the IRS but not with the service provider. Penalties for non-compliance range from $60 to $310 per form for late issuance and $630+ per form for intentional disregard, while maximum penalties range from $630k to $3,783k per year for late issuance with uncapped penalties if it is determined that the business intentionally disregarded filing rules. Failing to provide service providers with timely 1099s can have real and profound tax consequences for both your business and the service provider you’re building a working relationship with.

Can I Use Tech to Manage 1099s?

Absolutely. And fortunately, there are many tech platforms in the market today that can help manage 1099 maintenance and issuance in a stressfree and compliant way.

When deciding which platform is best for your business be sure to contemplate functionality, user experience and total costs, as well as the platform’s ability to interact with other business critical systems. Below is a list of some of the options on the market today:

Note: List is based on market research and personal experience; not all platforms have been personally used

Summing up why 1099s matter

There’s a high likelihood that your business will be required to issue 1099 forms to certain service providers every year. If your business is utilizing contractors to juice up short-term gaps in team skillset, external legal counsel to help team members navigate immigration issues or working with a new landlord as your team & office landscape expands, your business needs to issue 1099 forms at year-end.

Stay on top of your vendor relationships at the onset. Request proper tax information - via a W9, W-8BEN or W-8BEN-E - before you complete your first payment to services rendered. Create a business policy to check with vendors on a regular cadence to ensure no changes to tax information. Monitor payments made to service providers, both in totality and the method used to make payments. File timely to avoid unnecessary penalties.

Don’t do it alone! Demo the solutions on the market to find the right solution for your business.

Reach out to Afino if you have questions on 1099 form compliance, management and issuance!