How to prepare and issue 1099 forms for independent contractors

Year-end can be stressful for accounting departments that rely on manual accounts payable processes.

Accounting teams have a lot on their plate during the financial close: juggling daily accounting tasks, preparing financial statements, and issuing tax documents under tight deadlines. This involves managing a vast amount of financial data, records, documents, and accounts — and there’s zero room for error. Relying on slow, error-prone manual processes and spreadsheets is a recipe for disaster.

As every controller knows, preparing 1099 forms and issuing them to vendors is a crucial yet time-consuming part of year-end. Vendors need the 1099s to accurately report their annual income, and the Internal Revenue Service (IRS) has strict deadlines. If a company mishandles 1099s, it can lead to significant financial penalties, damaged vendor relationships, and a lot more stress for accounting departments.

There’s a better way.

Leading financial automation platforms bring communications, documentation, and payments together in one place to optimize AP processes. They take the stress out of year-end by helping you complete tasks in far less time and with fewer errors.

In this article, you’ll learn how using AP automation helps you streamline the 1099 process and issue accurate forms on time. We’ll explain what 1099s are and how they work, go through the drawbacks of using manual AP processes, and share how automation improves the process.

Let’s begin!

What is Form 1099?

The IRS uses 1099s to track “non-employee compensation”, i.e., business payments to non-employees that aren’t reflected in your payroll. Generally, you issue 1099 forms to independent contractors, freelancers, and vendors who provide your business with a professional service. All companies that pay independent contractors are required by law to issue a 1099 form to each vendor every year.

There are several types of 1099 forms, but the most common ones are the 1099-NEC (non-employee compensation) and 1099-MISC (miscellaneous).

What is a 1099 vendor or independent contractor?

The two terms are essentially the same and can be used interchangeably.

The IRS defines independent contractors as “people such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession.” Vendors covered by the IRS requirement include freelancers, sole proprietors, partnerships, and individuals. Although some corporations are included, the term generally excludes limited liability companies. For example, Julie works as a freelance graphic designer. She creates a website for BTB Technologies. Because she is considered an independent contractor and not an employee, BTB would be required to send her a 1099 NEC at year-end.

When do you need to issue a form 1099-NEC for a vendor?

Payments you make to independent contractors form part of their taxable income but aren’t included in your company’s payroll. Therefore, you must issue a 1099-NEC to report payments to an independent contractor if you paid that contractor more than $600 during the year. The deadline to file the 1099 with the IRS and issue it to the contractor is January 31 — which gives you 31 days from year-end to issue the forms.

What payments are exempt from 1099-NEC reporting?

The IRS lists several types of payments that are exempt from the 1099-NEC reporting requirement. They include:

• Most types of payments to corporations.
• Payments for merchandise, telecommunications, storage, freight, or similar goods.
• Wages paid to employees (use a W-2 form instead).
• Business travel allowances for employees.
• Rent paid to real estate agents or property managers (note that rent paid to landlords must be reported under the 1099-MISC form).
• Most payments to tax-exempt organizations such as charities, foundations, or religious groups.
• Payments made by credit card and certain third-party payment providers (the providers report these payments using form 1099-K).

When do you use a form 1099-MISC?

You must issue a 1099-MISC form for specific types of payments not covered by the 1099-NEC. The reporting threshold for the 1099-MISC is $10 in royalties or $600 in other payments. The 1099-MISC reporting requirements include payments for:

• Rents
• Prizes and awards
• Medical and health care payments

You must file 1099-MISC forms by February 28 if you’re filing by paper or March 31 if you file electronically.

Steps to prepare and send 1099s

You need to complete several steps to prepare 1099s and issue them to vendors. The basic steps are similar for the 1099-NEC and 1099-MISC forms.

Identify and track 1099 vendors

Begin by identifying vendors who qualify as independent contractors. Record your rationale for categorizing each vendor as an independent contractor — the IRS may ask for it later. After you’ve identified the 1099 vendors, ensure that you can easily keep track of them to avoid having to search for them at year-end.

Gather 1099 vendor details

The next step is to gather the correct information from each 1099 vendor. Collect a W-9 form from each vendor to obtain their tax identification number (TIN), business name, address, and other details. Record this information in your vendor files.

Calculate total vendor payments and check for exemptions

After year-end, calculate the total amount your company paid each vendor during the year. Check your list for vendors you paid under $600 — you don’t need to file a 1099 for these vendors. Separate the vendor payments into amounts you must report under 1099-NEC and 1099-MISC.

Create the 1099s

Once you have collected the vendor details and total payments per vendor, you can complete the 1099-NEC and 1099-MISC forms. The IRS provides detailed instructions on how to complete the paper forms. Alternatively, you can use software or an online 1099 filing service to file the forms electronically.

Send the 1099s

After completing the 1099-NEC and 1099-MISC forms, send them to the IRS and vendors by the filing deadline. Note that paper and electronic 1099-NEC forms are due January 31, paper 1099-MISC forms are due February 28, and electronic 1099-MISC forms are due March 31.

If you’re filing paper 1099s with the IRS, you must also complete and send form 1096 (Annual Summary and Transmittal of U.S. Information Returns) with the 1099s.

Challenges of manually preparing and issuing 1099 forms

Manually preparing and filing 1099s can be a time-consuming and complex process, especially if your business has many independent contractors or vendors. Tasks like gathering vendor details and payment information, calculating withholdings, completing forms, and sending them to vendors and the IRS require meticulous attention to detail. Relying on slow, error-prone manual processes leaves your company vulnerable to potential risks. Here are some of the challenges manual 1099 processing poses for businesses.

Time-consuming data entry and organization ties up resources

Manually gathering and organizing vendor details and payment data for 1099 filings can be very time-consuming, especially for businesses with a large number of contractors. The process often involves sorting through piles of invoices, receipts, and payment records and entering data into spreadsheets. It can take days to complete and puts stress on accounting teams already under pressure at year-end.

For example, BTB Technologies’ accounting team is processing the company’s year-end. One of the AP clerks gets sick and is housebound. Because the team relied on the clerk’s tribal knowledge of the 1099 vendors, the company is late issuing 1099 forms to the IRS and vendors. BTB is penalized for late filing, which has damaged its relationships with its independent contractors.

Increased risk of errors and IRS penalties

The process of manually collecting vendor data, entering it into spreadsheets, and completing 1099 forms is prone to human error. If your business misses a filing deadline or reports an incorrect amount on a form, it could face IRS penalties, audits, or damaged vendor relationships.

For example, BTB hires Sally, an IT consultant, to work on their network. They pay Sally $5,000 for her work, but an AP clerk makes a mistake, and BTB doesn’t issue her a 1099-NEC at the end of the year. Fortunately, Sally tracks her finances and includes the $5,000 on her tax return. If she had missed it, she may have failed to include the payment and faced penalties.

Difficulty tracking payment methods and categorizing expenditures

Ensuring the correct payment amounts and 1099 classifications for a large number of vendors with different payment methods can be challenging.

For example, BTB Technologies pays vendors by check, ACH, and credit cards. It hires Julie for two graphic design projects at $1,000 each. After each project is completed, Julie sends an invoice for $1,000 to BTB. BTB pays the first $1,000 invoice by paper check and pays the second $1,000 by ACH. Because BTB uses two separate payment systems for checks and ACH, their accounts payable team fails to capture the ACH payment while they’re preparing Julie’s 1099-NEC. As a result, they send Julie and the IRS an incorrect 1099-NEC for $1,000. When Julie files her taxes, the IRS catches the discrepancy between the 1099 and her reported income.

Potential for lost or misplaced 1099s

Paper 1099 forms can get lost in the year-end shuffle or misdirected during mailing, potentially leading to missed deadlines and frustration for vendors.

For example, Allison, the controller at BTB Technologies, plans to drop off the company’s completed paper 1099 forms at the post office after she picks up her rottweilers at the doggy daycare. Unfortunately, it was raining, and Allison left the forms on the back seat of her car. When her excited, muddy dogs jump in, the forms are destroyed.

Best practices for issuing 1099-NEC forms

Manually preparing 1099s can be frustrating. Fortunately, there are some best practices you can follow to streamline the process.

Determine 1099 status and collect W-9 during vendor onboarding

Add a step in your vendor onboarding process to determine US-based vendors’ 1099 status. This can be as simple as asking if they are a sole proprietor or incorporated. Have all independent contractors complete a W-9 to ensure you capture the necessary details to complete their 1099 later.

Review bank account information

Regularly review bank accounts, payment platforms, credit card statements, and other records for cash, check, EFT, or credit card payments to vendors that total over $600 for the year.

Err on the side of caution

If you don’t know if a vendor needs a 1099-NEC form, treat them as if they do and send one. It helps you avoid the cost of missing a submission, and there’s no penalty for filing an unnecessary form.

Record 1099 payment information during the year

Proactively identify and track payments to 1099 vendors during the year to avoid having to rush during year-end.

Automate accounts payable processes to improve speed and accuracy

Consider investing in a financial automation solution to automate and streamline accounts payable and payment workflows. AP solutions eliminate manual processes to make invoice capture, data entry, and coding faster and more precise. They also feature tracking and reporting capabilities that provide accounting teams with the necessary data to complete 1099 forms efficiently and accurately.

Let’s look at the ways AP automation helps your accounting team process 1099s faster.

How AP automation helps streamline 1099 processing

Automating accounts payable helps your accounting teams process and issue 1099s faster and more accurately. Here’s how:

Automated vendor data collection

Half the battle with preparing 1099s is gathering all the required vendor details. Leading financial automation platforms feature self-serve vendor portals that allow vendors to upload their own information. Solutions like Stampli can also help keep vendor details up to date by comparing invoice and purchase order header details to existing records and flagging AP staff when there’s a discrepancy.

Stampli Advanced Vendor Management solution lets companies onboard vendors with ease. It automatically collects and maintains vendor information like tax identification numbers, payment methods, account details, and addresses. You can configure Advanced Vendor Management to require vendors to provide W-9s and other critical documents and keep them updated. The information is stored within Stampli, making it easy to access when preparing 1099s.

“Stampli provides a compatible platform with our accounting software system that helps make the payment process easier.” says one customer. “The vendor management portal has also been very helpful to our vendors in updating their information with us and asking us questions on specific invoices.”

Accurately track and record 1099 payments

Financial automation platforms automatically capture and process invoice and payment data. Eliminating manual invoice processing frees up accounting resources and significantly reduces data entry and accounting errors. They also provide an accurate record of 1099 vendor payments, making it easier for accounting teams to prepare 1099 forms at year-end.

Stampli tracks vendor payments by date, amount, and payment method (check, ACH, or card) and reports the total annual amount paid to each vendor. It can tag and keep track of 1099 vendor invoices, ensuring that all necessary payment details are readily available when generating 1099s.

One customer describes how, by eliminating paper from their AP processes, Stampli has transformed their year-end: “Less PAPER!!!! This is a HUGE thing for me that Stampli has helped with. As a multi-location company, our management team is spread out to several locations, which means sending paper invoices interoffice can essentially take days, whereas with Stampli, they receive an invoice instantaneously! I don’t have to pack up boxes and boxes of invoices at year-end, which means I can actually take a vacation at year-end.”

Centralized 1099 vendor information

Automation systems unify invoice and payment processes onto a single platform to provide a central location for vendor details and transaction data. This saves accounting teams from having to search multiple systems for payment information when they’re preparing 1099 forms.

Only Stampli centralizes all information, communications, and documents on the invoice to provide a single source of accounts payable information. With Stampli, users can easily access reports and vendor information when it’s time to prepare 1099 forms.

One Stampli customer praises how Stampli provides all the information they need in one place: “Stampli provides a great hub for AP processing where you can find where any invoice sits in the coding-approval-posting-payment lifecycle. This has greatly increased our efficiency versus our previous system of routing invoices for approval through email, storing individual digital copies manually, and then posting manually.

“The tendency of occasional invoices getting lost during the approval process (thanks to emailing them out for approval and then having no visibility on them) has been eliminated. Questions or issues with an invoice can be addressed and discussed all within Stampli, without the invoice losing its place in the coding-approval-posting process. Obviously, it has also made coding faster and easier thanks to the AI and other features.”

ERP integration ensures up-to-date 1099 data

Leading financial automation platforms integrate with ERPs and accounting software to automatically sync vendor details and transaction data. Integration ensures a single source of truth for 1099 vendor information, eliminating errors and streamlining 1099 preparation.

Stampli’s pre-built ERP integrations support full native functionality and data synchronization for over 70 ERPs. Stampli automatically synchronizes invoices and vendor data with your ERP, so you’ll always have up-to-date information when it comes time to prepare 1099s. Depending on your ERP, Stampli can also synchronize 1099 status — if a vendor is marked as a 1099 vendor in the ERP, Stampli will automatically mark it as a 1099 vendor in its records. When invoices are exported from Stampli to an ERP, Stampli will automatically update the 1099 status in the ERP.

“We process over 1,000 invoices a month where each had to be manually added to our ERP system which would take our staff days. Stampli has been able to reduce this entry time to a fraction of what it was – hours,” says one Stampli customer. “This has freed up our staff’s time to work on other areas of our business. Having a software which also issues payments on our behalf saves time not having to manually print, sign and stuff checks.

“By and large, if there was one essential area of Stampli benefitting our business is TIME. Stampli being cloud-based has assisted our company with document storage of having all invoices accessible at the touch of the button compared to storing on our own network which can be cumbersome to sort through. Approval process is a breeze for users where all information is located on one screen for review, which [is] a detailed audit trail showing what steps the invoice has gone through.”

Make 1099 preparation simple with Stampli

Stampli helps accounting teams prepare 1099 forms quickly and accurately, streamlining your tax reporting process and ensuring you hit filing deadlines. It automatically keeps vendor information and transaction data up to date, eliminating the need for time-consuming manual processes.

Here’s how Stampli makes 1099 preparation simple.

Automatically updated vendor information

Stampli’s Advanced Vendor Management solution automatically keeps vendor details and tax identification numbers up to date, saving valuable time at year-end.

Timely and accurate payment data

Stampli automatically captures, codes, and records 1099 vendor payment data, replacing manual invoice processes and spreadsheets.

Seamless ERP integration ensures data integrity

Stampli’s pre-built integrations support the full functionality of over 70 ERPs and accounting platforms, ensuring all 1099 payment data and vendor information are up-to-date across your organization.

Learn how Stampli can make 1099 preparation easier for your accounting team. Contact one of our AP experts today.