A Friendly Guide to Filing 1099s for Parishes and Small Businesses

As the end of the year approaches, many parishes and small businesses find themselves juggling numerous responsibilities. Among these tasks is the often-overlooked process of filing 1099 forms. If the mere mention of “1099” makes your head spin, don’t worry—you’re not alone. This guide is here to help you understand the ins and outs of 1099 filing in a straightforward and approachable way.

What Is a 1099 Form, and Why Does It Matter?

A 1099 form is an informational tax document used by the Internal Revenue Service (IRS) to track various types of income that aren’t related to wages, salaries, or tips. Essentially, it’s how the IRS knows about income earned outside of regular employment.

For parishes and small businesses, filing 1099s is crucial because it ensures compliance with tax laws and helps avoid potential penalties. It also promotes transparency and fosters trust with those you do business with.

Who Should Receive a 1099?

Understanding who needs to receive a 1099 is the first step in the process. Generally, you need to issue a 1099 form to individuals or unincorporated businesses you’ve paid $600 or more during the year for services.

Recipients Who Should Receive a 1099:

1. Independent Contractors and Freelancers:
   • Example: You hired Sarah, a freelance graphic designer, to create a new logo for your church and paid her $800. Sarah should receive a 1099-NEC (Nonemployee Compensation).
2. Unincorporated Service Providers:
   • Example: Your small business paid $1,200 to Mike’s Plumbing, a sole proprietorship, for repairs. Mike’s Plumbing should receive a 1099-NEC.
3. Landlords (for Rent Payments):
   • Example: You rent office space from John Doe, an individual property owner, and paid him $10,000 in rent this year. John should receive a 1099-MISC (Miscellaneous Information).
4. Attorneys (Regardless of Incorporation Status):
   • Example: You paid $1,500 to Smith & Associates, an incorporated law firm, for legal services. Despite being incorporated, they should receive a 1099-NEC.

Who Does Not Need a 1099?

Equally important is understanding who does not need to receive a 1099. Issuing unnecessary forms can cause confusion and extra work for both parties.

Recipients Who Do Not Need a 1099:

1. Corporations:
   • Example: You paid $5,000 to Tech Solutions Inc., a corporate IT service provider. Corporations are generally exempt from receiving 1099s, except for legal and medical services.
2. Employees:
   • Example: Jane, your administrative assistant, receives a regular paycheck and a W-2 at the end of the year. Employees receive W-2 forms, not 1099s.
3. Reimbursements to Volunteers or Members:
   • Example: A parishioner named Emily purchases supplies for a church event and submits a receipt for reimbursement. Since Emily is being reimbursed for out-of-pocket expenses and not compensated for services, she does not receive a 1099.
4. Payments for Merchandise or Goods:
   • Example: You bought $1,000 worth of books from Book World LLC for your church library. Payments for products or goods don’t require a 1099.
5. Payments Made via Credit Card or Third-Party Networks:
   • Example: You paid a contractor through PayPal or a credit card. The payment processors are responsible for reporting these transactions, so you don’t need to issue a 1099.
6. Tax-Exempt Organizations:
   • Example: You made a donation or payment to another non-profit or tax-exempt entity. These organizations typically do not receive 1099s.

The Importance of Collecting W-9 Forms Before Making Payments

Before you issue any payments to a contractor or vendor, it’s essential to collect a completed W-9 form from them. This form provides you with their Taxpayer Identification Number (TIN) and other necessary information for tax reporting.

Why Collect a W-9 Before Payment?

• Ensures Accurate Reporting: Having the correct legal name and TIN helps you avoid errors on the 1099 form.
• Avoids Penalties: Incorrect or missing information can lead to fines from the IRS.
• Facilitates Communication: Establishes a clear line of communication regarding tax obligations.

How to Request a W-9:

• Standard Practice: Make it a routine part of your onboarding process for new vendors or contractors.
• Provide the Form: You can download the W-9 form from the IRS website and send it via email or provide a hard copy.
• Secure Handling: Ensure that the completed forms are stored securely to protect sensitive information.

Step-by-Step Guide to Filing 1099s

Let’s break down the process into manageable steps.

1. Keep Detailed Records Throughout the Year

• Track Payments: Use accounting software or spreadsheets to record payments to each vendor or contractor.
• Categorize Transactions: Label payments as “services,” “rent,” etc., to easily identify those requiring a 1099.

2. Collect and Verify W-9 Forms

• Before Payment: Request a W-9 form from each new vendor or contractor before issuing payment.
• Verify Information: Ensure all required fields are completed and that the TIN matches the name provided.

3. Determine Who Needs a 1099

• Review Payment Thresholds: Identify those you’ve paid $600 or more for services during the year.
• Exclude Non-Qualifying Payments: Remember who doesn’t need a 1099, such as corporations (with exceptions) and reimbursements.

4. Complete the Appropriate 1099 Form

• Fill in Accurate Details: Use the information from the W-9 to complete the recipient’s name, address, and TIN.
• Report Total Payments: Enter the total amount paid during the year in the appropriate box on the form.

5. Provide the 1099 to Recipients

• Deadline: Send the 1099 forms to recipients by January 31st.
• Delivery Methods: Mail a paper copy or, with consent, send electronically via a secure method.

Common Mistakes and How to Avoid Them

1. Missing Deadlines

• Set Reminders: Use a calendar or digital alerts to keep track of important dates.
• Start Early: Begin preparing forms well before the deadlines to account for any issues.

2. Inaccurate Information

• Double-Check Entries: Verify all names, addresses, and TINs against the W-9 forms.
• Use TIN Matching Services: The IRS offers a TIN Matching Program to validate information.

3. Not Issuing 1099s to All Required Recipients

• Review Payment Records: Ensure no eligible vendors or contractors are overlooked.
• Understand Exceptions: Be clear about who doesn’t require a 1099 to avoid unnecessary filings.

4. Confusing Reimbursements with Payments for Services

• Clarify the Nature of Payments: Reimbursements for expenses are not the same as payments for services.
• Example: If a volunteer buys supplies and you’re paying them back, they don’t get a 1099.

Penalties for Non-Compliance

Financial Penalties:

• Late or Inaccurate Filing: Penalties can range from $50 to $290 per form, depending on the delay.
• Intentional Disregard: If you intentionally fail to file, penalties can be much higher.

Impact on Your Organization:

• Financial Strain: Accumulated penalties can affect your budget and financial health.
• Reputation Risk: Non-compliance can damage your organization’s credibility.

Making the Process Easier

Filing 1099s doesn’t have to be stressful. Here’s how you can simplify the process:

1. Establish a Routine

• Standard Procedures: Develop checklists for onboarding vendors and contractors.
• Staff Training: Ensure your team understands the importance of compliance.

2. Use Technology

• Accounting Software: Automate tracking and reporting to save time.
• Secure Storage: Protect sensitive information with encrypted systems.

3. Seek Professional Assistance

• Bookkeeping Services: Professional firms can handle the details for you.

Our bookkeeping firm specializes in helping churches and small businesses with their 1099 filings. We can manage the entire process, ensuring everything is accurate and submitted on time, giving you peace of mind.

Real-Life Examples: Who Gets a 1099 and Who Doesn’t

Scenario 1: Contractor vs. Employee

• Situation: You hire Alex to perform maintenance work around the church and pay him $1,000 over the year.
• Action: Since Alex is an independent contractor, he should receive a 1099-NEC.

Scenario 2: Reimbursing a Parishioner

• Situation: Emily, a church member, purchases supplies for a community event and submits receipts totaling $300 for reimbursement.
• Action: Emily is being reimbursed for her expenses, not compensated for services. She does not receive a 1099.

Scenario 3: Incorporated Vendor

• Situation: You pay $2,500 to Bright Lights Electric Inc., a corporation, for electrical services.
• Action: Corporations are generally exempt, so no 1099 is needed unless it’s for legal or medical services.

Scenario 4: Volunteer Stipend

• Situation: Mark volunteers to coordinate an event and receives a $200 stipend as a token of appreciation.
• Action: Since this is a payment for services but below the $600 threshold in total payments for the year, Mark should not receive a 1099-NEC. However, if total payments are over $600, a 1099 is required.

Scenario 5: Payment Through Third-Party Platforms

• Situation: You pay a freelance writer through PayPal for articles on your website.
• Action: Payments made via third-party platforms are reported by the platform if they meet certain thresholds. You typically do not need to issue a 1099 in this case.

Making the 1099 Process Work for You

Understanding who needs a 1099 and streamlining the filing process can save you time and prevent unnecessary stress. By keeping accurate records, staying organized, and seeking assistance when needed, you can navigate tax season with confidence.

Remember, our professional bookkeeping services are here to help. We offer personalized assistance tailored to your organization’s needs, making the 1099 filing process hassle-free.

Key Takeaways:

• Know Your Recipients: Clearly distinguish between those who should and should not receive a 1099.
• Stay Organized: Keep meticulous records and establish standard procedures.
• Educate and Communicate: Ensure everyone involved understands the importance of compliance.
• Seek Help When Needed: Don’t hesitate to consult tax professionals for guidance.

By integrating these practices into your routine, you can ensure compliance with tax laws, avoid unnecessary penalties, and focus on what truly matters—serving your community and growing your organization.