Catching Up with Your Contractors Before 1099 Time

In a little over a month, it will be 2015 and time for year-end accounting chores.   One of those chores is getting your 1099s out, and now is a good time to tie up loose ends so the year-end process can go smoother.  Here are some tips to do just that:

  1. Go through your vendor list and make sure each contractor that you are paying is marked in your accounting system as a contractor eligible for a 1099.
  2. Obtain a W-9 form from each contractor if you haven’t already, and update the address and federal EIN for each contractor.  This will ensure that you have the most current information for each contractor and that they will receive their 1099 promptly.

    If you need to make any changes in the way you are paying them or withholding taxes, you’ll have a chance to update that information as well.
  3. Ask your contractors for a worker’s compensation certificate.  If you don’t have one, you might need to add their payment totals to your payroll amounts on your worker’s compensation audit worksheet.
  4. If your accounting system doesn’t break out payment type, you’ll need to do that on a separate spreadsheet before you input the 1099 amounts.  Contractors paid with a check will require 1099s.  Contractors paid via PayPal or credit card will not.   If you have paid them both ways, you will need to break it out.  You can do the bulk of the work now and post the remainder of the year after year-end.
  5. Consider re-evaluating each contractor as to whether they meet the employee versus contractor tests from the IRS.  If you are accidentally misclassifying a contractor who the IRS defines as an employee, you will be responsible for social security, withholding, and other payroll taxes, which can add up to huge numbers for small businesses.

    This is a “red flag” area for the IRS, meaning they are looking to “bust” employers.  However, they also have a Voluntary Classification Settlement Program for people who have been misclassifying workers in the past and want to come clean.

Following these five steps will put you in great shape for year-end.  And if you need help catching up with your contractors or with any related issues, please let us know.

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Oops: Do You Owe Sales Tax and Not Realize You Do?

One of the side effects of our last economic slowdown was in state government budgets; states searched hard for new income, and many of them found a great source by cracking down on sales tax collections.  Their new hot buzzword:  nexus.

Nexus means a connection that a business has with a state, and it has to do with a form of presence.  In the sales tax world, you owe sales tax to a state if you have nexus in that state and you are selling taxable items.  The scary part for small businesses is what makes up nexus.

A Small World

Globalization and technology together have produced dramatic shifts in the way businesses can look today.  Not only can we access a pool of local talent to staff and grow our businesses, we can employ almost anyone around the world to work for us. Hiring employees or contractors located in other states can stretch our nexus to include that state.

As an example, if your company is located in Illinois and you hire an employee that works from her home in Nevada, you might have nexus in Nevada and Illinois, and you might owe sales tax in both places.  Sales tax nexus is not the same as state income tax nexus, but the presence of a worker in another state is a possible trigger for sales tax nexus.

Taxable in One State, Not in Another

The taxability of services has grown rapidly as states look to balance their budgets after Federal cuts and other shortfalls.  Not all services are taxed equally across states.  Web design services are taxable in Texas, but not California, as one example.

Some states have smaller jurisdictions such as counties and municipalities, making for a total of 10,000 jurisdictions in the U.S., not just 50.  Alabama, Colorado and Arizona, for example, have statewide rules as well as taxability rules for localities within the states.

Innocuous Survey Can Trigger Audit

You might receive a form that looks like a survey and asks innocent-looking questions such as how many employees do you have and what state do they work in.  The surveys don’t look like they are from a state government but they might be.  It’s their way of getting you to admit nexus.    Please do not let a worker fill these out; it could expose you to a huge liability.

Minimizing Sales Tax Audit Risk

Because of the high dollar impact on the profitability of your business, it’s best to get a sales tax professional involved in helping you determine the taxability of your items as well as interpreting nexus.  Many states are hiring auditors and aggressively pursuing businesses, so due diligence in this area is prudent.

If we can help in any way, please reach out and let us know.

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