Year-End Considerations for Your Business
As 2020 nears a close, now is the time to put yourself and your business in good shape for 2021. This blog discusses 1099-MISC and 1099-NEC and other expenses and itemizations to review with your professional tax advisor during the final weeks of December.
Form 1099-MISC or 1099-NEC?
Are you paying vendors that require a 1099-MISC? In 2020 the IRS added a new form called 1099-NEC and most of your vendors that received a 1099-MISC in past years will likely now need to receive a 1099-NEC. It’s important to remember that the 1099-NEC is not a replacement form for the 1099-MISC, but it is replacing it only for the purpose of reporting independent contractor payments.
What Payments Do You Include on 1099-NEC?
You should include payments to individuals that do not receive a W-2. This includes individuals, Limited Liability Company (LLC), and partnerships. And only if the payment is $600 or more. In general, you don’t have to send payments to C Corporations and S Corporations. The best way to determine this classification is to have all your vendors complete a W-9 before payment is distributed. It is best to have your vendors complete their W-9 in January of each year. A W-9 can be found online or Boeckermann Grafstrom & Mayer (BGM) will provide one to you.
Examples of reportable payments include, but are not limited to:
- Non-employee payments to an individual, LLC, or partnership for:
- Fees
- Services
- Commissions
- Awards
- Other services
- Attorney fees for legal services
- Accounting for professional fees
Why is the 1099-NEC not replacing the 1099-MISC?
The 1099-NEC is not replacing the 1099-MISC because the 1099-NEC is for non-employee payments only. You should still use the 1099-MISC for all other types of payments. You may notice that the form has a new design and some of the box numbers and formatting have changed.
Examples of payments that you might use the 1099-MISC include, but are not limited to:
- Rent
- Direct sales of $5,000 or more
- Payments to an attorney; such as payments in connection to a settlement agreement
- Crop insurance proceeds
- Other income payments
It is important to file 1099s each year and to submit them by the last day of January. The IRS does impose penalties if they are not filed on time.
Other Year-End Items to Review
When you are looking through your numbers, it is recommended that you separate the various expenses. You may find it helpful to discuss this with your tax professional, in order to receive maximum benefit. These items include:
Business Meals and Entertainment
Separate your business meals from your entertainment. Newer rules and regulations from the IRS require that your books show separate entries for your business meals and entertainment expenses.
Mileage and Auto Expenses
All your mileage and auto expenses need to be recorded in the books by year-end. Discuss with your tax advisor if you are unsure how this can best benefit your business.
Shareholder Payroll
With only a few weeks left before year-end it is important that all shareholders have taken payroll, if needed. To determine what is necessary you will need to have your books caught up and talk with your tax advisor to determine a planning strategy and tax liability, if any.
Shareholder Health Insurance
If the company is paying for shareholder health insurance, make sure that yearly total paid for the insurance is being put on the individuals W-2 for the current year tax benefit.
There are many annual and year-end benefits that BGM’s Outsourced Accounting Services can help you with, including referring you to a tax professional that could possibly reduce some of your tax liability. If you have any questions or would like to learn more, please reach out to Cory Parnell, Principal, at cparnell@bgm-cpa.com or fill out the Contact Us form.
