It’s time to change your IRS 1099 policies

(With 1099s and other IRS documents due at the end of the month,  Matt Scherer, one of our contributors, sat down with Steve Cook, the principal of Cook and Gola, and Ed Guerrero, a partner at Guerrero CPA, to get their thoughts on how businesses can improve this business process.)

Q1:  Why do so many businesses scramble with getting these forms out to their contractors?

Steve Cook: Simple.  It’s bad administrative processes for most small business departments.  They forget to get a W-9 from their contractors before getting a check.  A lot of contractors tell their partners that they need the check right away to pay salary for their team or other pressing needs.  A well-meaning person wants their contractors to get paid, but they forget to get this form filled out.  Another major issue occurs when the business tries to locate the right address, social security number or IRS EIN.  Guess what?  A lot of people have moved on.

Ed Guerrero:  It’s amazing how many businesses call me on the morning of the last day of January to ask for my help in locating their vendors.  As their CPA, I told them in early January of the need to get this information to me.  Yet, I know they will wait until the last minute to have me or someone on my staff to try to find the address and Social Security number.  I’ll make a lot of money for this service, but it’s a waste of financial resources.  For the extra money they spent on my staff running down 1099 information, they could have spent it on needed equipment or marketing outreach.

Q2:  What can a business do to improve their 1099 process?

Steve Cook: It’s very simple.  You start with the requirement that every contractor completes the W-9 before you release payment to them.  W-9s aren’t difficult.  An EIN or Social Security number along with a current address is all that’s needed to complete one.

Ed Guerrero: I would add the requirement that when you meet with a new or current contractor that you give them the IRS forms.  For a new contractor, you would tell them that as part of submitting their proposal that they would need to complete a W-9 with it.  That way, if you accept their proposal you then have this form on file.

Q3:  What new changes have occurred with releasing 1099s?

Steve Cook: The IRS is getting more stringent with the requirement to report all monies paid to vendors.  Until last year, a person got a 1099 for labor.  Now, you have to report other services such as purchasing equipment or training if the business spent more than $600 for them during one year.

Ed Guerrero:  I agree with Steve on this.  I would add that businesses now need to rethink their tax strategy to consider ways to document major purchases.  Their accountant or bookkeeper needs to update their reporting processes through software programs like Great Plains or QuickBooks.

Steve Cook:  The IRS is doing this to collect more taxes.  I think they believe that this additional reporting requirement will generate a significant amount of tax revenues in the years ahead.

Q4:  Is there anything else you wish to add?

Ed Guerrero:  Professionals like technical consultants,  realtors and lawyers need to really rethink their processes with 1099s.  I have helped a lot of them change their documentation processes for paying vendors which in turned lowered their tax liabilities.   You would be surprised at how many real estate professionals overlook the need to fully report  a payment to have an appraiser look at a house or pay for repairs to a property.  I am not picking on realtors. But, their industry is typical of the small entrepreneurial types who overlook this critical aspect of their business.

Steve Cook: Regardless of your profession, documentation is the key to everything.  Keeping track of all purchases and services is something that everyone should do besides tracking their mileage.

Ed Guerrero:  With the shift in economy, many people are starting second careers.  I have talked to many successful business professionals who want to start in consulting again after retiring with full benefits.  While they worked in a corporate environment, they had someone handle their taxes.  Now, they need to think through the ways they can lower their federal tax liability.

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About Jason Myers

Jason Myers is the editor-in-chief of the Texas Entrepreneur Network and can be reached at jason@txenetworks.com