The IRS requires Form 1099-MISC to be filed for all individuals to which you have paid more than $600 in rent, services, or payments to an attorney. The services item only applies if the payee is not an employee. Other categories apply, but these three are the most common that our accountants see each year.
We advise all our clients to collect W-9 forms from people that they will be paying even if at the time they don’t think the person will earn more than $600 in a calendar year. It is best practice to not release payment to your contractor until you have a W-9. While some businesses include their EIN on their invoices, you still should obtain a W-9 Form because it has a legally binding signature on it.
Collecting the form is just half the battle, however. The majority of forms that we see are not filled out correctly. So when accepting W-9 Forms from your vendors, ensure it is filled out according to the below rules.
If the person that is being paid is just a person (no company name on line 2, then they should only then be able to enter an SSN in Part I. If only line 1 is filled out, an SSN is required and the checks you write should be made out to a person. If a person is only filling in line 1 and only providing an SSN the first box on line 3 should be checked: “Individual / sole proprietor or single-member LLC.” Everyone checking this box on the form is required to receive a 1099-MISC if they meet the dollar threshold.
If your contractor wants their check made out to a business name and writes this name on line 2 of the form, then an EIN number in Part I is required. Just remember: Businesses have EINs; people have SSNs.
As you can see on line 3 of the form there are various types of business entities listed. The most confusion we see circles around LLCs and rightly so because some LLCs may need a 1099-MISC while others may not. An LLC with only 1 member/owner is a single-member LLC and for these purposes considered an individual. See the Individual section above, but note this is the one time where an “Individual” might have both an SSN and an EIN. You can make the check out to the business in this case if an EIN is provided.
An LLC could otherwise be a partnership or a corporation. If the LLC box is checked on the second row of line 3 the tax classification must also be written in. Partnerships do need a 1099. Corporations of the S or C variety do not need a 1099. If the LLC identifies as either a partnership or a corporation then line 2 must be filled in and an EIN must be provided.
Regardless of business type, all forms should be signed.
When creating a new vendor in QuickBooks, enter their SSN or EIN into the vendor details area. This way, when you or your accountant go to process 1099s at year-end, the information is already entered. In the worst case scenario where you are paying someone without obtaining the W-9, at least tick the box within the vendor details area so tracking of the vendor occurs. This will bring the vendor into the QuickBooks 1099s wizard at year-end and make you aware of the missing SSN or EIN.
I also recommend saving a PDF copy of the W-9 Form in the vendor details area within QB. And finally, it is best practice to have new W-9 forms filled out on occasion as addresses can change and individuals can form companies.
It’s never too early in the year to run through the 1099 wizard within QuickBooks, make a list of who you need to get W-9s from, and start that process now so January is less hectic.
Form 1099s are due to the IRS and recipients by 31 January. If you need help let us know. We can e-file your forms for you and digitally (and/or by snail mail) send them to your vendors.
If you are looking for an accountant in Cleveland or someone to help with payroll services in Cleveland and the surrounding communities, call us today. We are here to help with everything from Quickbooks training to consulting for small businesses and larger firms’ more complex accounting problems.