1099 Processing Should Be Easy

About every two years, I receive an email from a client’s bookkeeping firm requesting a W-9. That’s not unusual, right? But one or two weeks into the new year? That’s problematic.

I have a deep controllership background, and my teams were obsessed with efficiency and timeliness in month-end closings, tax returns, and audit reports. And 1099s? Let me tell you a quick story about how 1099 processing should be done.

Processing More Than 500 1099s

In one of my controller roles, we processed more than 500 1099s each year. Even though we had a strong HR department that did the majority of the work, I still hated it because it was time-consuming, but we executed some tactics that I’ve had clients repeat, too:

1. We paid no contractor until they submitted their W-9 form. No exceptions.
2. All W-9 forms were immediately entered into our ERP and payroll reporting systems — they were integrated through custom coding, so the data entry was done only once.
3. HR submitted the 1099s to our contractors the first week of January.
4. All required paperwork, including Form 1096, was submitted to the IRS by the middle of January.

Please review the steps above one more time. Can that happen in your business? As a financial performance coach and consultant, I do not spend much time on accounting tasks. However, I will speak up when I see glaring, avoidable errors, especially for bookkeepers winging the 1099 process.

Form W-9 Is Confusing

A Google search on filling out a W-9 yields more than a million results. Does that mean this is a high-risk form to complete? It’s not, but it can be.

Also, I would love to know the error rate for those who turn in a W-9 to an organization. There are only a few lines to fill out, yet many payees complete them improperly. Here are some common errors:

• For whatever reason, tax classifications can be an issue for the person filling out the form.
• The name sections are botched when the payee operates an LLC (disregarded and those taxed as partnerships).
• Especially in the above situation, payees provide their Social Security number and EIN (both). The Social Security boxes should be left empty if an EIN is provided.

I can attest that many small bookkeeping firms ask for these forms via email. That’s a huge no-no. When I’m asked for a W-9 via email, that tells me a lot about their professionalism.

Since these short forms are subject to error, I’ve had numerous clients issue replacement forms that use easy-to-understand language for every line and box that needs to be filled in or checked. These replacement forms leave no room for reader ambiguity.

When I ran an outsourced controllership firm, we received these forms via a secure private portal (ours was called the Client Portal by Creative Solutions, now owned by Thomson Reuters). In your case, you should use an SSL-encrypted tool to receive these documents.

I learned years ago that this step alone significantly sped up the process.

The Small Company 1099 Process

Once we have a good W-9-like document, we can complete the 1099 as follows:

1. Create a simple matrix revealing who needs to complete our newly created W-9 document. Incidentally, certain payees may live in a 1099 shade of gray. As a strict rule of thumb, over-comply with the IRS (always) by sending the contractor a 1099.
2. When setting up a new vendor, refer to the matrix above. If the payee is subject to a 1099, immediately issue the form created above.
3. Only pay these new vendors once the substitute W-9 has been received. This will reduce compliance headaches down the road. Bookkeepers asking for W-9s in January will never happen again.
4. On or about the third or fourth business day of the new year, review the list of payees subject to 1099 for completeness, accuracy, and propriety. Do not audit the data; give it the sniff test.
5. Download the list in CSV format so your payroll firm can read it into its system. Have that provided and submit the form to payees by January 15th. Then, have them submit all other necessary paperwork to the IR, including Form 1096.

1099 processing is easy, or it should be. My teams and I have followed the procedures above because we have far more critical work to do. The methods are both foolproof and efficient.

More than fifteen years ago, I got my payroll firms involved in the 1099 process. As a process improvement junkie, I’m constantly looking for ways to both save time and add quality to the same workflow. Fifteen years ago, we were still processing these forms on paper, and it was a timely and burdensome endeavor. When I asked one of my payroll providers if they could submit 1099s, they answered, “Yes, and for a small charge,” similar to W-2 processing fees. If you outsource payroll, outsource the submission of your 1099s, too.

Should CPA Firms Complete Your 1099s?

Before wrapping up, let’s address CPA firms. Specifically, I’m focusing on the firms that file your taxes or audit your financials for the bank.

Should you have your firm complete the 1099s? While they probably can, are they in that business to process these forms? Processing 1099s is a high-volume activity requiring minimal expertise. That’s why payroll firms are probably the better option for pricing. Are there exceptions? There could be, but I’d suggest comparing the pricing of your CPAs to payroll firms that can process 1099s.