Given that a W-2 is required for all US salaried employees making over $600/year, chances are that you’re familiar with the W-2 tax form. But what about 1099 tax forms and the tax collection process for contract workers? Despite the rise of the “gig economy” and contract workers, many are not familiar with the 1099 compliance life cycle. This quick guide is designed to improve fluency around 1099s and get you started on your journey to 1099 tax form submission.
The term “1099 Compliance Lifecycle” refers to the various stages and processes associated with the issuance, filing, and reporting of income types that payees receive, not typically subject to regular wage withholding (i.e. non-W-2 wages). Like W-2 tax forms, 1099 forms are submitted to the Internal Revenue Service (IRS) at the end of the calendar year to ensure accurate income reporting and taxation.
While there are eight key activities associated with the 1099 lifecycle, we like to think of the 1099 Lifecycle in four primary segments: Collect, Verify, Generate, and Submit.
The table below shows the eight key activities by segment. We’ll further explore each segment and the associated activities in later sections of the guide.
Before a business makes payments to a non-employee, such as a freelancer or contractor, the payer will need to collect payee details using a W-9 tax form. Information collected in a W-9 tax form includes payee name, address, Tax Identification Number (TIN) like a Social Security Number (SSN) or Employer Identification Number (EIN), and the amount paid. This step is important to ensure timely and accurate reporting on 1099s.
The collection step varies widely among payers, both in how the information is collected from payees and when the information is collected. Some payers collect information from payees during the onboarding and registration process, others wait until they know exactly which payees will reach reporting thresholds (i.e. require a tax form). While both methods have merit, Abound recommends upfront collection. For a streamlined, easy process, the Abound Drop-in Component is a prebuilt UI for collecting the payee info. We find that capturing the required information at the time of onboarding ensures your tax team doesn’t have to spend precious time chasing down or correcting information during tax season.
Once you’ve collected your payee’s tax information, you’re ready to submit your tax forms - right?
While you are technically able to submit your 1099 tax forms trusting that your payee has entered their information correctly, there is a way to verify payee information before 1099 tax form submission and avoid fees associated with incorrect or incomplete tax form submissions.
When you submit a 1099 tax form, the IRS will run that tax form through its database to see if it matches the legal name and TIN of the payee. If any of the information on the tax form does not match, the payer will have to work with the payee to correct the form and re-submit prior to tax deadlines (and pay associated costs/penalties).
To avoid the headache of corrections and resubmissions, Abound recommends TIN Matching to verify that the TIN (Tax Identification Number) matches the legal name provided by the payee as an automatic next step when the payee relationship is initiated. There are numerous options for handling the TIN matching step - for more detail, read our Complete Guide to TIN Verification or reach out to us directly to see how we can automate this process for you.
After the tax year is finished, you will need to generate a 1099 form for each payee meeting the minimum income threshold of the 1099 form type. There are various types of 1099 forms, each corresponding to a specific type of income and different income thresholds. For example:
While it is possible to submit 1099 tax information to the IRS without generating the physical (or digital) form itself, Abound recommends generating a tax form prior to formal submission and confirming its accuracy with the payee. This will ensure that payee information is up to date and reported payments line up. Adding this simple and (with the right partner) automated step, you can avoid tax form corrections and the associated penalties from the IRS.
Each 1099 form type has a different deadline for when you’re supposed to with the IRS, so it’s important for the payer to understand what deadline(s) applies to their business and tax form submissions. Payers have the option to submit tax forms by mail or electronically (specifically Copy A), either via an internal team or outsourced to a tax partner. To maximize internal resources and reduce overhead, Abound recommends using a partner API to automate 1099 tax form submission. This provides you with complete control, security and ownership of your data without stretching your existing team to work excruciating hours or perform duties outside their areas of expertise.
Further, payers will need to deliver 1099 to payee (specifically Copy B) by January 31st of the following calendar year. This can be achieved by mailing a physical copy or, with payee consent, electronically (instructions for electronic consent can be found here). Similar to filing with the IRS, providing copies to payees can be an internal activity or outsourced. Any missed deadlines or failure to comply will result in penalties, so keep it as simple as possible.
Once the payee has received their 1099 copy, they will have the information necessary to file their personal taxes. They will need to accurately report the income listed on all 1099 forms they receive on their individual tax returns. If tax withholdings have not been sufficient throughout the year to account for final reported income, the payee must pay any balance of applicable taxes when filing with the IRS.
Note: payers will also need to submit a copy of the 1099 form to states that have a reporting requirement but do not participate in the Combined Federal/State Filing Program (CF/SF). If you are using a vendor, ensure that they also fulfill the state reporting obligation where relevant.
Throughout this guide, we’ve introduced the necessary steps for both payers and payees in the 1099 lifecycle and discussed how to avoid corrections and penalties, but what happens if, despite your best efforts, corrections are necessary?
When errors occur in the preparation of 1099s, you are required to issue corrections. This is accomplished by filing a new 1099 form with the corrected information and checking the “corrected” box at the top of the form. The updated form then goes through the typical 1099 process; delivery to the payee,the IRS, and the state. Be aware that different types of errors might require specific corrective actions, so it's vital to follow IRS guidelines to ensure accuracy and avoid additional penalties.
Abound recommends partnering with a 1099 vendor that provides a correction filing process to avoid the distraction of filing corrections and/or the pain of manual entry. For more information on the correction process or how Abound can assist, refer to our 1099 filing article.
Understanding the 1099 lifecycle is key to any business looking to pay non-employee wages or income. From the initial collection of information with a W-9 form, to the generation, filing, delivery, and potential correction of the 1099s, each step carries significant responsibility and requires attention to detail (whether performed internally or outsourced). Hopefully, this guide has provided enough context to help you have the conversations you need to support tax payments within your business.
If you have questions or would like to learn more about any of these steps or how Abound can assist in managing and even automating the 1099 lifecycle, please reach out to us: partners@withabound.com
