Using Stampli Expense Data to Properly Issue Required 1099s to Vendors

Businesses must complete a number of tasks related to tax reporting at year-end and that includes issuing 1099s. Vendors need accurate 1099s in order to report total revenue for tax purposes.

Managing an accounting department after year-end can be challenging. You must complete the day-to-day accounting transactions, generate tax reporting documents (W-2s, 1099s), and issue the financial statements. Automation can help you complete tasks in far less time and with fewer errors. Here’s how to use Stampli’s AP automation to generate data to issue accurate 1099s.

Important Points Regarding 1099s

Before diving into the details, here are some general points regarding 1099s:

• Independent contractors vs. employees: 1099s are issued to report nonemployee compensation. Employees are issued W-2s, while independent contractors and other vendors are issued 1099s.
• Dollar amount threshold: Not every vendor receives a 1099. Companies issue 1099s when a vendor is paid more than a specific dollar amount during the year.
• Some vendor payments are exempt: Generally speaking, corporations are not issued 1099s. Freelancers and independent contractors, however, are issued 1099 forms.
• Using the correct 1099 form: There are several types of 1099 forms depending on the type of payment made to a vendor. This blog post focuses on the Form 1099-NEC.

Refer to the IRS Form 1099-NEC instructions for more detailed information. 

Understanding Form 1099-NEC 

Business owners must use IRS Form 1099-NEC to report nonemployee compensation, including payments to independent contractors. The IRS defines this work as services performed by someone who is not your employee. Payments must be made for business purposes and personal payments to vendors are not reported.

For tax year 2021, any vendor who is paid $600 or more must receive a 1099-NEC. Businesses are required to send 1099s by February 1st, 2022.

Vendor payments that are exempt

Here are several types of payments that do not require a 1099. Keep in mind that there is a difference between the 1099 reporting requirement and how the vendor reports the payment for tax purposes. The vendor may need to include the payment as revenue in the tax return, even if no 1099 is received.

To illustrate, assume that Standard Manufacturing pays Julie a total of $350 for work as a freelance graphic designer. Since the total amount is less than $600, Standard does not issue a 1099 to Julie. However, Julie must include the $350 is revenue in her tax return.

These transactions are also exempt from the 1099-NEC requirement:

• Payments to corporations, including limited liability companies that are treated as C corporations or S corporations.
• Payment for merchandise, freight, or storage. 1099s are used to report payments for services performed, rather than the purchase of goods.
• Rent payments to real estate agents and property managers.

If you’ve issued 1099s in past years, most of the activity was posted on Form 1099-MISC. The rules recently changed and Form 1099-NEC is now used to report nonemployee compensation. Some payments, however,  are still reported using 1099-MISC.

Payments reported on Form 1099-MISC

In 2021, these amounts are reported on the 1099-MISC form, assuming that the business pays at least $600 to a vendor:

• Rent
• Prizes and awards

Also, royalty amounts over $10 are reported on the MISC form.                                                   

Your business must determine if each worker is an employee or independent contractor. Employee income is reported on Form W-2 and nonemployee compensation is reported on the 1099-NEC.

Determining if a worker is an independent contractor 

This IRS publication is used to determine if a worker is an independent contractor. Two key factors are work flexibility and supervision. Generally speaking, employees have less flexibility in how they perform work and are more closely supervised. 

The IRS uses three common law rules to determine the degree of control an employer has over a worker:

• Behavioral control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial control: Are the business aspects of the worker’s job controlled by the company? (These include things like how a worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
• Type of relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Julie, the freelance graphic designer, decides on the software she uses to complete her work and has a flexible work schedule. Standard Manufacturing, the client, does not provide insurance or other employee benefits. Based on the IRS guidelines, Standard would likely classify Julie as an independent contractor, and send her a 1099-NEC at year end.

You are required to follow the IRS guidelines, make a judgment on the worker’s classification, and to document your decision.

Steps to create 1099 forms

A business needs to complete several steps to generate accurate 1099s for vendors. Automation, including Stampli’s AP and invoice management software, can make the process much easier.

• Data collection: You need to collect information on each new vendor so that you can generate 1099s with the correct vendor name and address.
• Total vendor payments: After year-end, you need to generate a report listing each vendor and the total amount that the vendor was paid for the year. 
• Create the 1099s: Use software to generate a 1099-NEC for each vendor that was paid $600 or more during the year.
• Sending 1099s: Businesses are required to send 1099s to vendors by February 1st, 2022. You’ll also send a copy of all 1099s to the IRS, along with Form 1096.

The IRS wants to ensure that each vendor reports the 1099 revenue on the vendor’s tax return. If a vendor is audited, the IRS can review each 1099 issued for a particular year and verify that the 1099 amounts were reported on the tax return.

If a business does not issue a correct 1099, the vendor may not file an accurate tax return. Stampli’s AP automation can help you issue accurate 1099s.

How Stampli can prevent 1099 problems

Here are two errors that may create problems for a vendor:

The company does not issue a 1099

In this example, assume that Standard Manufacturing hires Sally, an IT consultant, to work on the firm’s cloud computing system. Sally is paid $3,500 during 2021, but is not issued a 1099. Standard uses a manual system to review vendor payments and the AP assistant makes an error.

Receiving a 1099 prompts the vendor to include the payment as revenue. Hopefully, Sally tracks all of her customer payments and includes the $3,500 Standard payment as revenue on her tax return. If Sally’s recordkeeping is not organized, she may not include the $3,500 payment in the tax calculation.

Stampli’s software tracks each vendor and the total payments received for the year. You can easily print a Stampli report with the data you need for 1099s.

Issuing an incorrect 1099

What if Sally is paid $3,500, and that Standard’s manual process generates an incorrect 1099 for $3,800? When Sally receives the 1099, she doesn’t question the amount because the difference is small. She records $3,800 of Standard revenue on her tax return and pays a higher tax liability, due to the error.

Incorrect 1099s also create problems for Standard, because the $3,800 1099 amount does not match the $3,500 company expense for Sally’s IT consulting. If the company submits incorrect 1099s and finds the errors, it must issue corrected 1099s to both the IRS and to each vendor. 

1099 errors may upset vendors and the Standard may pay fees and penalties to the IRS. Avoid these problems by using Stampli’s AP automation.

How Stampli can help

The first few months after year end can be difficult for an accounting department, but it doesn’t have to be. Automate each routine task that you must perform, including AP and expense management. 

Stampli offers the most powerful AP automation available. You can stop shadow spend by bringing invoice and credit card management together. Launch in weeks, not months, by working with Stampli’s award-winning success team. Use Stampli to simplify the 1099 process for your accounting team.