Pay me now or pay me later: managing 1099s throughout the year

If your company is not based in the United States (or even if they are!) there are business mysteries behind banking and taxation that don’t exist in many other places and sometimes don’t seem to make a lot of sense. A lot of those requirements originate from state and federal level regulations. This blog series will uncover what those mysteries are and how to understand them as systems that can be easily managed with Microsoft Dynamics NAV and Dynamics 365 Business Central.

Once a year, by January 31st, US-based companies are required to send out 1099 forms to non-employee vendors who are not associated with corporate entities. They do this to maintain compliance with the Internal Revenue Service (IRS), the government entity in charge of regulation of income tax in the United States. The purpose of the 1099 is two-fold: to report to the non-employee vendor the amount of money that was paid to them in the prior year for the purpose of reporting their personal income taxes by April 15^th, and to report the same numbers to the IRS so they could be used in comparison if the person was later selected for audit.

Optimally, when a company begins to work with a vendor, they will gather a copy of their W9, which provides the information of whether they are or are not a 1099 vendor. Once the company knows this, Dynamics NAV and DYNAMICS 365 Business Central allow the vendor to be set to “yes” for 1099s, and for the company to designate what type of 1099 vendor they are.

Realistically, many companies experience delays in getting this form and may make a payment prior to this option being set. Luckily, Dynamics NAV and DYNAMICS 365 Business Central make it easy to deal with this as well as a few other conditions by adding two fields to the Vendor Ledger Entries screen. These two fields allow the company to flag any payment as 1099 even after it has been paid and posted. In addition, the company may also designate the amount of the payment to be flagged as 1099 reportable if the whole amount paid to the vendor is not eligible. This condition may exist if the vendor submits reimbursable expenses for things like travel in addition to the charges for their services.

We suggest that companies make a review of 1099 payments a part of their month-end process to make it easier to catch these types of corrections throughout the year instead of at the end of the year.

Once the last December payments have been processed and posted, and the results are reviewed for accuracy, the company can run their 1099s. There are a couple of ways to do this.

Type 1: Use the built-in forms in Dynamics NAV and DYNAMICS 365 Business Central. This is not my favorite method, as it requires the company to purchase pre-printed 1099 forms to print the data onto, which average about $20 USD per pack of 50 forms. It also requires that the company have their partner or a developer update the form’s format when it is changed by the IRS, which happens periodically.

Type 2: Purchase a small add-on software package that allows simple data mapping from the ERP to the add-on. Once the data is imported, it can be printed to plain paper so it can be mailed to the vendor. It can also be electronically submitted to the IRS, which is required if you file over 250 returns for the year. Our personal favorite that we recommend to our clients is 1099-etc.com which costs $79 USD (in 2019) and is updated every year.

Type 3: Outsource it. There are plenty of CPAs, bill pay, and payroll services who will generate and send the 1099s based on the data you send them from your ERP system.

If you’d like some help with de-mystifying business processes and correct system setup related to US-based accounting practices, please get in contact with us to discuss how New View Strategies can help. We have specialists with deep accounting expertise in using Dynamics NAV and Dynamics 365 Business Central who can move quickly through the requirements for your company and establish clear and accurate processes to manage these complex business needs.  

Looking for more topics related to US-based accounting? Check out the rest of our related blogs at the links below.

Why is the U.S. still using paper checks and what to do about it (Part 1 of 3)

Why is the U.S. still using paper checks and what to do about it (Part 2 of 3)

Why is the U.S. still using paper checks and what to do about it (Part 3 of 3)

The good, the bad, and the ugly side of US bank reconciliations

Pay me now or pay me later: managing 1099s throughout the year

What’s wrong with U.S. sales tax and how to make it right with your ERP system

What is South Dakota vs. Wayfair and why should companies who sell online care?

O Canada! GST, HST, GIFI and other three- and four-letter words related to Canadian taxes