In theory, IRS 1099 compliance should be a relatively simple endeavor, even for companies that employ many contractors, freelancers, and agencies. Simply request a W-9 from each of these vendors, copy their information into IRS-approved templates, file 1099s with the IRS, and then send copies back to the vendors. It may sound easy, but seasoned accounts payable and bookkeeping professionals know that a variety of complications lurk behind each of these steps, which can result in fines for missing forms, backup withholding for filing mistakes, and even liability for insufficient security protocols. To help clarify the full landscape of 1099 compliance, let’s dive into three specific areas of concern:
W-9 collection
Challenge: The IRS insists that you collect W-9s from vendors, and they may enforce
that guideline with fines. Moreover, accuracy also matters at this initial stage. It’s
important to request a vendor’s precise legal name, address, and taxpayer identification
number, but there’s no guarantee that the information they put on paper will be correct
(or even legible). If the IRS later discovers an error, you will need to rectify it with the
vendor, sometimes involving backup withholding up to 24%. The situation begs the
obvious question: how do you ensure accuracy when the reason you’re collecting this
information in the first place is because you don’t know any of it?
Solution: The best way to directly address this challenge is by automatically validating
a vendor’s legal name and TIN at the point of onboarding. The right automated software
solution can reject a vendor’s W-9 in real time if their information is inconsistent with the
IRS database, thereby placing the onus on the vendor to get their information right
before you accept their submission. (Bonus: You should also be able to task your
software to validate a vendor’s mailing address, thereby reducing the number of “return
to sender” mailings you receive during the busy filing season should you choose to
utilize postal mail.)
Central and secure W-9 storage
Challenge: If you’re a custodian of a vendor’s social security number, then you have a
potential liability on your hands. A single data breach (perhaps the result of a phishing
or ransomware attack) can jeopardize the trust they’ve placed in you and expose your
business to expensive litigation.
Solution: Keep your vendor’s W-9s away from your email, off your laptop, and out of
your filing cabinet. The best solution is to receive and store W-9s via dedicated software
that at minimum maintains SOC 2 Type 1 security protocols for all its functions,
including W-9 collection, e-filing, e-delivery, and file transfers.
Delivery to the IRS, states, and recipients
Challenge: Anybody with responsibility for 1099 compliance knows all too well that the
window for e-filing and e-delivery is narrow and stressful. You need time to gather payee
information from your accounting platform, but most 1099s need to be postmarked to
recipients by January 31 st and filed with the IRS by March 31 st . There’s precious little
time to waste on manual processes.
Solution: A streamlined e-filing solution can deliver the efficiencies to make this
situation palatable in the crucial month of January, but only if it’s an end-to-end
approach that combines the ability to import payee data from accounting platforms,
quickly transfer data from W-9s into government-approved 1099 templates, e-file 1099s
to the IRS (and individual states), e-deliver 1099s to recipients, utilize postal mail if
desired, and seamlessly correct previous filings when necessary. Unless your
automation software addresses all of these needs at once, you’ll lose valuable time
toggling between multiple workflows while the IRS mandated deadlines draw ever
closer.
Avalara’s streamlined approach to 1099 compliance
The interlocking issues outlined above make IRS 1099 compliance inherently difficult,
but Avalara believes that the challenges associated with even complex use cases can
be overcome with the right combination of experience and automation. That might
explain why nearly 200,000 businesses have used Avalara 1099 & W-9 to make it
easier to collect, manage, and e-file their IRS forms.