Do Accounting Firms Get a 1099?

All varieties of accounting firms including those that are single entities, partnerships, or corporations deal with form 1099 in some way. This is one of the most important forms of the U.S. tax system as it is applied to the income received that is free from withholding tax. This article describes the details of when and how accounting firms are involved in working with form 1099.

Understanding Form 1099

The form 1099 is another instrument used by the IRS to document income that is in any other form that is not wages, salaries, or tips.

There are several ways this form exists:

1099-NEC (Non-Employee Compensation): Shows income received from an individual or business that is not a corporation.

1099-MISC (Miscellaneous Income): This is used to report payments that had not been classified in any of the other forms; however, many of them are now reported in 1099-NEC.

1099-INT (Interest Income): Shows all interest received, i.e., from bank accounts or any form of investment.

1099-DIV (Dividend Income): This is used for reporting dividend incomes from investments.

1099-B (Proceeds from Broker and Barter Exchange Transactions): Reports sales of securities or barter transactions.

How 1099 Relates to Accounting Firms

Depending on what type of accounting firm it is and/or what kind of services that they perform, accounting firms may give out or get 1099 forms. Since there are many versions of form 1099 and multiple factors that define the interaction with it, it is necessary to focus on how it works depending on the structure of the firm and the nature of the transactions.

When Accounting Firms Receive a 1099

Independent Contractors and 1099-NEC

Outsourced accounting firms are providers who offer services to clients and are not employees of the company. In such cases, the firm receives a 1099-NEC form from the client into which some details of the firm’s information have been entered. This form gives the gross amount paid to the firm from all its services within the tax year. The rule for the threshold for issuing the 1099-NEC is $600 or more in the calendar year.

Example Scenario:  

Paid tax preparation services are another common service offered by an independent accounting firm to its different clients over a fiscal period. If a client pays the firm $800 for these services, a 1099-NEC form should be filed by the client to the firm for $800.

Interest and Investment Income

Interest income may be received from bank balances or various investments made by the accounting firms as a business entity. In such cases, the bank or the financial institution will send to the firm a form 1099-INT, which indicates the interest income earned for the year they are paying taxes.

Example Scenario:  

A business operation of an accounting firm involves a checking account with interest earned from a bank. All this happens because the bank will issue to the firm a 1099-INT form with the information about the received interest income.

When Accounting Firms Issue a 1099

Payments to Independent Contractors

In general, when an accounting firm hires independent contractors to work for them to provide certain services, this firm must issue the 1099-NEC form the independent contractors if the amount paid to them was more than $600 in the calendar year. This pertains to those contractors who are not on the payroll of the firm.

Example Scenario:  

An accounting firm employs an independent worker to help in a big project. If the firm pays the contractor $1,200 during the year, then it has to include to the contractor a 1099-NEC form.

Barter Exchanges

In occasions that an accounting firm deals with barter transactions, they have to account for this transaction in a 1099-B form. Barter trades deal with the exchange of commodities/shares of stocks with no money; the value must be stated and generally this amount must be fair market.

Example Scenario:  

An accounting firm offers bookkeeping services in return for website design from a graphic designer. Of the two types of services, the fair market value is to be filed in the form of a 1099-B.

Common Misconceptions

Accounting Firms as Employees

Since accounting firms work for clients, they are, in effect, employees and as a result, are not issued 1099 forms. But it has to be noted that there is a significant difference between an employee and an independent contractor. This is so because the W-2 forms are provided to the employees of a company while the 1099 forms are for independent contractors.

Key Factors of Independent Contractor:

Independence: The client does not dictate how the work should be conducted.

Financial: On the financial aspect, the management of the firm is solely responsible for bearing all the business expenses.

Term: It is actually more of a project-based or fixed-term affiliation rather than an open-ended one.

All Payments are Reportable

Not all payments that one makes to or receives from an accounting firm necessitate the preparation of a 1099 form. For example, payment made for any goods instead of services, or those payments that amount to less than the required reporting mandate will not require a 1099.

Compliance and Recordkeeping

Appropriate compliance to the 1099 requirement is crucial for any accounting firm.

This includes:

Filling out of Accurate Forms: 1099 forms should be sent to the contractors or clients by the 31st of January the following year.

Recordkeeping: Maintain accurate records of all payments made to the independent contractor, along with any relevant receipts for items purchased by the contractor that will be reported on 1099 forms.

Filing to the IRS: Make sure to submit all the 1099 forms you issued to others to the Internal Revenue Service by February 28th of the respective year. If you’re filing electronically, the deadline is March 31st of that same year.