As the summer winds down and we are well into the second half of 2019 (gasp!), now is the perfect time to give your business its annual 1099-MISC wellness check. Have you been keeping up with your W-9 collections throughout the year? Are you considering everyone who may require a 1099? Are you paying non-PA resident vendors who are performing services in Pennsylvania? From time to time, we will come across a business that has great intentions, believing they are being compliant in this aspect, yet are utterly shocked at some rules they just never knew existed. Let’s dig into these considerations to make sure you are ahead of the game well before the January scramble (due January 31st).
The basics of form 1099-MISC are:
- Due to vendors paid in total of $600 or more in the calendar year for services.
- If a vendor is incorporated, tax-exempt, or foreign, no 1099 is provided.
- Exception: Law firms. All legal fees of $600 or more are to be reported on a 1099, despite incorporation status. (Pro Tip: Law firms almost always put their EIN & address on their invoices so you do not need to request a W-9.)
- Common mistake: Assuming individual subcontractors are the only ones who receive a 1099 – This is not the case! For example, if “The Best Company, LLC” performs design services for your business, request a W-9 from them. LLCs can take on many forms of legal structures such as sole proprietorships, partnerships or corporations; you will not know whether you are required to file a 1099 until you receive their W-9.
- Additional exception: Pay vendors by credit card – credit card revenues are already reported to the IRS on form 1099-K by the credit card companies, so payments to vendors via credit card are not required to be reported on 1099-MISC.
Apart from the obvious contractor/consultant vendors providing services, consider these additional services that would require a 1099:
- Rent (office, banquet rooms, building space, storage, etc.)
- Services performed by someone who is not your employee (including parts & materials used in performing services)
- Legal services
- Merchandise that is custom-made
- Advertising (where the ads are created by the vendor)
- Payments to the beneficiary of a deceased
- Royalty fees (this is requirement starts at $10 – not $600!)
- And more!
Now why do you need to care about non-residents performing services in Pennsylvania? As of January 1, 2018, this is Pennsylvania’s effort to make sure it is collecting taxes from out-of-state residents who are making money performing services in their state. Here are the basics: if you have an out-of-state vendor performing services for you in Pennsylvania, you must be withholding PA tax from their pay (3.07%). This goes into effect if you are paying this vendor $5,000 or more annually. If you are unsure on the total you will pay a vendor annually, it is recommended that you withhold & remit income tax to be safe. If all of this is applicable to you and you do not know where to go next, reach out to Stephano Slack and we will help guide you.
While this article feels packed full of information, there is so much more to this annual requirement. Even though our team of 1099 experts file hundreds of forms annually, we come across multiple situations a year we have never encountered before that really take a moment to think about and consider. Believe it or not, there are grey areas in this compliance (second gasp!) Take the time NOW to give your business this wellness check.
If you have questions along the way, please feel free to reach out to Samantha Musser at email@example.com. If you would like Stephano Slack to handle your 1099 preparation, please contact Samantha Musser no later than December 1st, 2019.
Samantha Musser, CPA