Are you prepared for Form 1099-Filing?

With the end of the year quickly approaching, most organizations and accounts payable (AP) departments are beginning to review payments they’ve made during 2022. Now is the time to determine if any require that a Form-1099 be filed. Filing the appropriate Form-1099 on time is critical, so there’s tremendous benefit in beginning this review now rather than waiting until the tax year is over.

The best place to start is with your vendor master file. Once you’ve identified the need to file a Form-1099 for a payee, you must confirm you have accurate data in your vendor master file to ensure compliance. Ask yourself:

1. Do I have a valid W-9 on file?
2. Did I complete a TIN verification of the information provided on the W-9?
3. Do I have the vendor appropriately classified in your system for 1099, and the correct Form-1099?
4. Is the address in my system of record up to date?

If you don’t have confidence in your documentation, you may find yourself in a compromising situation. This could lead to thousands of dollars in IRS fines and penalties.

For the tax year 2022, the penalty for a late filing (within 30 days late) is $50 per form. However, you’re also charged per IRS copy and per payee copy. This could quickly turn that penalty into $100 per form. Also, the penalty increases with each period of time you’re late and incurs interest on top of that. So why wait? Start your review today!

Make the W-9 form part of your AP policy and process

An individual or business that is required to file an information return (which includes a Form-1099 with the IRS) must obtain the correct taxpayer identification number (TIN) of the recipient. The signed W-9 form helps ensure you received the payees TIN-which can be a social security number, employer identification number, or another IRS-approved identification number - and also certifies that the TIN and the legal name of the payee is correct.

It’s in your best interest and best practice to always require a W-9 before entering the vendor into your system or issuing payment. This will help you avoid penalties and backup withholding requirements, which can be difficult to manage.

Collecting the TIN after onboarding or at the end of the year can be challenging because you’re in a time crunch to get the information for your 1099 reporting. You may also struggle to obtain a W-9 from someone who has long since provided the work or service and been paid.

Now that you have a W-9, why is TIN validation important?

Let’s first start by defining TIN matching or validation. It’s the process of collecting a company’s legal name and TIN (via a W-9) and then comparing that data to what’s on file with the IRS database. This is to confirm that you have accurate information when you report payments on a Form-1099.

As simple as that may sound, getting the right business name and TIN is not always a sure thing. Many organizations and independent contractors - especially those with DBAs (doing business as)- find that completing a W-9 is not always as easy. This is where TIN validation comes into play.

When an entity’s name and TIN don’t match IRS records, this generates an error notice (usually a CP2100 or CP2100A notice). Your organization must follow up with these notices (typically a B-Notice) and attempt to collect the correct information. This can be time-consuming and costly. If errors cannot be settled it results in potential penalties, fees, or withholding tax payments that would otherwise be the payee’s responsibility.

To avoid this, it is best to use a TIN matching or validation service upfront as part of the vendor setup process. This will ensure the vendor is set up correctly from the beginning. If TINs fail validation, you can follow up right away.

It’s important to have a company policy in place when handling these mismatches. It’s recommended that you:

1. Reach out to the payee.
2. Document your attempts to obtain the correct information.
3. Decide whether you will withhold or simply not set up the vendor and pay without a valid TIN match.

Either way, showing your due diligence to obtain the accurate name and taxpayer identification with the IRS can eliminate penalties and fines later.

DON'T FORGET: When reaching out for failed TINs, if you obtain corrected information, be sure to run the information through TIN matching again to guarantee the new information is correct. This will streamline your process and save your organization time, frustration, and money.

What you need to know about Form-1099 Compliance for 2022

There are too many changes for us to cover in this blog regarding the changes for the tax year 2022. Most AP payments focus on Form 1099-MISC and 1099-NEC, so make sure you’re aware of critical updates.

Both forms have removed the form year but allow the payer to indicate the calendar year for which payments are being reported, which is great because now you don’t have to toss forms from previous years.

Remember there are requirements for who must e-file (250 or more returns). There’s an open issue per the IRS that states: “The Taxpayer First Act of 2019, enacted July 1, 2019, authorized the Department of the Treasury and the IRS to issue regulations that reduce the 250-return requirement. If those regulations are finalized, they will be effective for tax years 2022 and beyond, with first filing requirements in 2023.” This is something to be monitored. The due dates are below.

Final Thoughts

Whether you’re feeling confident in your vendor master file, or this post just made you cringe, the good news is it’s not too late! The fourth quarter is the perfect time to make sure you have up-to-date W-9 forms on record and request missing information as needed.

If you have not completed TIN verifications, look into doing bulk verifications – I guarantee that even if you pay a one-time fee for a bulk match, it will be cheaper than the potential penalties from the IRS.

Also, make sure you’re reviewing vendor expenses so that you can properly prepare your 1099s since miscellaneous (MISC) and non-employee compensation (NEC) are now filed on two separate forms.

The filing deadlines come quickly after year-end; be prepared to file accurate,timely forms and avoid costly fines and penalties. No one wants the mistakes that come from scrambling at the last minute.