Business owners usually know that there are paperwork responsibilities involved when employing someone. What isn't always common knowledge is the differences between an employee and an independent contractor.
The IRS requires that organizations properly determine this, and if a mistake occurs, it is usually costly.
An employee classification depends on the degree of control that the employer has over the worker. An independent contractor decides when and how they work. They also dictate the payment for services and don't require expenses to be reimbursed.
The employer and employee relationship involves a contract, whether an employment contract or benefits like vacation, 401k contributions, insurance, etc. The employer must process and file 1099s for all persons deemed as independent contractors.
All contractors who receive $600 or more per year from your organization must receive a 1099 unless they are an incorporated business. All lawyers must receive a 1099 regardless of their business structure. Lastly, anyone you pay rent you must receive a 1099.
Of course, as with anything, there are exceptions. One thing most business owners don't know is that if you pay a contractor with a debit card, credit card, or Paypal the 1099 is issued by the merchant processor. That is why we recommend paying all vendors by debit or credit card whenever possible.
To ensure that your 1099 contractors are ready at the end of the year, you should obtain a W-9 IRS form for each one. You can use this form to enter the information by going to the 'Expenditure' tab on the left side of the QuickBooks Online (QBO) site. From the dropdown, choose 'Vendors.'
Click on the green box in the top right corner to add a new vendor.
When entering the vendor, add the full name, address, city, state, zip code, and email. You can also enter a phone number, billing rate, terms, and more. On the bottom right side of the screen, you will see a field to enter the Business ID or Social Security Number.
You must complete this section to run a 1099 form. Also, check the box that says 'Track payments for 1099'. There is an option for entering the default expense account, and this is helpful for accounting purposes.
In addition to a W-9 form, you should also request a workers compensation insurance certificate or waiver, as well as a general liability insurance certificate. Believe me when I tell you that the lack of insurance certificates is what gets most people in the case of an unemployment insurance audit. If the contractor is deemed invalid because you don't have the proper documentation they will reclassify the contractor payments as W-2 wages and you will owe back taxes.
There are two ways to generate and send 1099 forms for non-employee wages. You can purchase a 1099 kit and print the forms yourself from the file in QBO, or you can pay QuickBooks to print and mail your documents.
The second option is more straightforward because it can be tricky to line the 1099 forms up correctly in a printer. Also, if you don't purchase the forms early in the season, it can be challenging to obtain them. The steps are the same for each method until the very end.
If you'd like to prepare 1099s through QuickBooks Online, the pre-process doesn't begin until November 7th of the calendar year, so you may have to wait a little while longer until the 1099s actually populate.
Keep in mind that you can always see the 1099 information by going to the 'Reports' tab on the left-hand side of the QBO site. Scroll down to the 'Expenses and Vendors' section and choose the '1099 Transaction Detail Report'.
It is wise to run this report quarterly to ensure you enter all of the information correctly and promptly.