Client Education: 1099’s (updated 2021)
When you pay an individual or LLC $600 or more for services* over the course of the year, you have to file form 1099 at year-end.
The US tax system is based on income. When you pay someone, it’s income to them, and your responsibility to report it to the IRS. There are financial penalties if you don’t, and a process of backup withholding if you can’t.
1. Collect form W-9:
Before paying someone for their services, you need to have them fill out a W-9 (download below) so you can get their legal name, address, and tax ID number. (It’s common practice to ask for it before they do any work, that way you aren’t chasing it down at year-end, stuck with backup withholding responsibilities or potential noncompliance penalties.)
The W-9 will also identify their entity type and could determine you’re not required to file on them.
2. Track payments in QuickBooks:
Upload the completed W-9 to your client portal so we can put the W-9 in the vendor's record, marking the box to track 1099 payments.
Make payments** to the person/business throughout the year as usual
3. Prepare and send (we can provide this service for you)
Run 1099 reports
Fill out 1099 forms
Send to your payee, the IRS, and State
*I use the term services to describe the payments because it’s the most common, but a 1099 needs to be sent for other payments like rent to your landlord, royalties, attorney proceeds, awards, and some additional less common payments.
**Payments you make by credit card are not included because the merchant processor of your payee (which allows them to accept your credit card payment) will send a special 1099 to them for you.
And lastly, if you are on the receiving end of a 1099, keep it in your tax docs that you send to us at year-end. Likely we have already reported the income during normal bookkeeping on your P&L, so it’s just a formality at that point.