As the year winds down, it’s time to tackle an important yet often overwhelming task for many business owners: preparing for 1099s and tax season! In this highly-requested episode, Danielle Hayden, CPA and founder of Kickstart Accounting, Inc., teams up with Kelsey Chester, Kickstart’s Lead Account Manager, to deliver a step-by-step guide to staying organized and compliant with IRS rules when filing your taxes.
Whether you’re a seasoned business owner or just starting out, this episode has something for you. From IRS compliance to best practices for collecting W9s and knowing when to transition contractors to employees, Danielle and Kelsey cover it all with practical advice and actionable insights to help you tax prep with confidence.
Key Takeaways:
- Understanding W9s and 1099s: A W9 gathers contractor info, while a 1099 reports payments over $600—always collect a W9 before paying contractors.
- Best Practices for W9 Collection: Collect W9s electronically, store them securely, and require submission before issuing payments.
- Payment Methods and 1099 Requirements: Personal Venmo/Cash App payments may require a 1099, while business platforms like PayPal might issue them automatically—verify with the platform.
- Contractor vs. Employee: Contractors control their work methods and tools, while employees follow your guidance, schedule, and use your resources.
- Making the Shift to Employees: Transitioning to employees ensures compliance, builds retention, and avoids IRS penalties for misclassification.
- Plan Ahead for Payroll Setup: Start payroll planning early to streamline the January rush.
Topics Discussed:
What is a 1099 and a W9? (00:01:08 - 00:02:57)
Best Practices for Collecting W9s (00:02:57 - 00:04:12)
Storing W9s and Organizing Financial Records (00:04:12 - 00:05:10)
Who Needs a W9 and When to Collect It? (00:05:10 - 00:06:34)
Payment Methods and IRS Guidelines (e.g., Cash App, Venmo) (00:06:34 - 00:08:23)
Difference Between Contractors and Employees (00:08:23 - 00:11:32)
When to Move Contractors to Employees (00:11:32 - 00:14:20)
Benefits of Hiring Employees (00:14:20 - 00:15:00)
Clarification on Employee Benefits for Part-Time Employees (00:15:00 - 00:15:19)
Summary and Getting Help (00:15:55 - 00:18:28)
Resources:
Tax Forms | https://www.irs.gov/
Free Guides | https://kickstartaccountinginc.com/gift/
6 Tax Tips Every Business Owner Should Know
Book a Call with Kickstart Accounting, Inc.:
https://kickstartaccountinginc.com/book
Connect with Kickstart Accounting, Inc.:
Instagram | https://www.instagram.com/Kickstartaccounting
YouTube | https://www.youtube.com/@businessbythebooks
Facebook | https://www.facebook.com/kickstartaccountinginc
Episode Transcript
00;00;00;00 - 00;00;31;24
Danielle Hayden
Hello fellow entrepreneurs. It's Danielle here, CPA and founder of Kickstart Accounting Inc.. As this year winds down, we're gearing up for one of the most important tasks for any business owner preparing for 1099s and tax season. That's why we're bringing back this highly requested episode just in time to help you get ahead. In my conversation with Kelsey, we cover everything you need to know about collecting W9s, issuing 1099s, and staying compliant with the IRS rules for both employees and contractors.
00;00;31;24 - 00;00;54;28
Danielle Hayden
We're gonna help you navigate the tricky line between contractors and employees so you can make informed decisions going into the new year. So this episode is your step-by-step guide to staying organized and stress-free before the January rush. Let's dive in. Welcome back to Business by The Books, the podcast that teaches you how to use your financials to manage your business.
00;00;54;28 - 00;01;08;10
Danielle Hayden
Where we use bookkeeping as a vehicle to help business owners take control of their numbers. And I've helped thousands of entrepreneurs make informed financial decisions for over a decade. Kelsey, thank you so much for being here. I really appreciate it.
00;01;08;15 - 00;01;13;08
Kelsey Chester
Thank you. I always love being here, and it's actually been quite a while since I've been on the podcast. So this is really exciting.
00;01;13;12 - 00;01;40;22
Danielle Hayden
Yeah, Kelsey and I have a lot to say on W9s and 1099s, and we don't want to leave anything out for you. So this episode, although it's not the most fun episode, is something that you're really going to want to bookmark so that you can come back to this episode anytime that you're thinking about hiring a contractor or an employee, we’ll define that. If you're not sure if you're in your first few years of business and you are not sure who needs a 1099 or why and how to get prepared for that, we'll make sure that you have all the information that you need for that.
00;01;40;22 - 00;01;58;27
Danielle Hayden
And if you are a current client and you know that you have a team looking out for you, still really want you to understand kind of what to look for and best practices. So no matter what, we have something in this episode for you. So Kelsey, love starting at the very beginning so that we can define things for people so that they clearly understand what the hell we're talking about.
00;01;58;27 - 00;02;10;17
Danielle Hayden
Because when we start throwing out these IRS terms, I know it sounds like we're speaking another language. So what is a 1099 contractor? Like, how do you how do you define that and then what is a W9.? Yeah, those are.
00;02;10;17 - 00;02;36;24
Kelsey Chester
Yeah, those are the two terms that we're going to throw out there first. So a W9 is a request for information. So it's just a very simple form that you'll give to your contractor. And we'll break that one down in the second. All that's on there is their name, their address, their entity type. So if they're a sole proprietor, individual, LLC, partnership, S Corp, before any one of those, and their EIN or social security number, that's pretty much it.
00;02;36;24 - 00;02;57;08
Kelsey Chester
Then, they sign the form and give it back to you. And all it does is give you all the information that you need to fill in their 1099 at the end of the year. So a 1099 is just, again, a very simple form, but a very important form that gets sent to that contractor and to the IRS that is just basically the sum of all of the payments that you've sent them in that calendar year.
00;02;57;08 - 00;03;05;08
Kelsey Chester
So IRS says 1099s are due by January 31st, and that is for January through December of the year prior.
00;03;05;09 - 00;03;19;25
Danielle Hayden
Yeah. So think of it as their payroll stub. Right. Like they're not getting a paycheck from you or if they're a freelancer, any other company. So it's important that they have a record of how much they've been paid from your company and others so that they can file their tax return.
00;03;20;00 - 00;03;49;19
Kelsey Chester
That's right. And we really wanted to go into best practices for collecting these W9s for your contractors. So we recommend to all of our clients and for all of you, our listeners, to collect these W9s as you're paying your contract throughout the year. So even if, we hear so many times like, oh, I'm only going to pay them once, even if you think you're not going to work with those contractors on an ongoing basis, best practice is ask for the W9 before you send them your first payment.
00;03;49;19 - 00;04;04;28
Kelsey Chester
And this just ensures that you have all of the information that you need in case you end up having to file a 1099 for them at the end of the year. I've seen it so many times where we're scrambling at the end of the year to get the W9 because we didn't get it throughout the year. You know, we don't have the information to file a 1099.
00;04;04;29 - 00;04;12;02
Kelsey Chester
It's going to be late or the relationship went sour and the contractor is not responding, not going to respond. And here you are-
00;04;12;02 - 00;04;12;16
Danielle Hayden
It’s the worst one.
00;04;12;16 - 00;04;15;19
Kelsey Chester
Yeah-Can't file a 1099.
00;04;15;19 - 00;04;33;09
Danielle Hayden
I like the best practice of do not pay any contractor until you have the W9 in hand. Make that a practice that when you are doing business with somebody new, those funds don’t ever leave your bank account until you have the W9 and Kelsey, where would we store the W9? So once the business owner has this, you can do this all electronically,
00;04;33;09 - 00;04;39;05
Danielle Hayden
you don't need to see them in person. This is an electronic form. Once they have that, where should somebody store that?
00;04;39;05 - 00;05;02;03
Kelsey Chester
That’s right. And you can get this from the IRS website as a downloadable, fillable PDF and you can store it electronically. That's plenty sufficient for the IRS. So if you use Dropbox, Google Docs, SharePoint, share file, whatever it may be, you can store it in one of your dedicated folders. Wherever you keep all of your financial information, you just need to have access to it in case you ever get audited and the IRS
00;05;02;03 - 00;05;10;18
Kelsey Chester
says, why didn't you send them a 1099? And then you will whip out your W9 and say, this is why. They indicated they are an S Corp and we will get into why that matters.
00;05;10;18 - 00;05;24;14
Danielle Hayden
But yeah, I like having them by year. So whatever your electronic filing system is, have all of your nines filed by year so that you can really quickly, easily access that information. Let's talk about who actually do we need to be collecting a W9 from.
00;05;24;17 - 00;05;54;03
Kelsey Chester
Yeah, so any individual or business that is not an S Corp that has performed a service for you. So if they redesigned your website, if they did some one-off projects for you, if they did your landscaping, if they cleaned your office, what else do we commonly see? Virtual assistants. I mean, I could go on and on for days, but anyone that performs a service for you basically that you pay them by cash or Venmo, Cash App, PayPal.
00;05;54;03 - 00;06;06;14
Kelsey Chester
And there are caveats to that, that we'll get into. Basically anything but a credit card. Then they will be eligible for a 1099 if you pay them through those payment methods, $600 or more in that year.
00;06;06;14 - 00;06;23;01
Danielle Hayden
Now, the $600, I think this is what gets people. So a lot of people will say, I'm not going to collect a 1099 or W9 from that person until I pay them the $600, because I don't want them to think that they're going to get a 1099 from me until they're owed it. And I think that's a mistake that we make. Collect them now, collect them before you hit the $600.
00;06;23;01 - 00;06;34;14
Danielle Hayden
There's nothing wrong with having that information. If you don't hit the $600 and you don't need to send them a 1099, you'll still have that W9 in your file. No worries, right? Not a big deal just to have that that extra information.
00;06;34;14 - 00;06;49;12
Kelsey Chester
And just think about it. As an employee, you know, either your employees or you as an employee, you're not going to pay employees without them filling out their appropriate paperwork first. And no company is going to pay you as an employee without you filling out your employee paperwork. So think about it in that way as well.
00;06;49;12 - 00;07;21;08
Danielle Hayden
That's a really good point. I've never started a job where it was like, yeah, sure, I'll-I’ll fill that out later. Back in the day, they would lock you in a conference room and say, come back once everything is filled out. That is really, really helpful. Let's talk about the Cash App, PayPal situation. I think the IRS is working really hard to catch up and provide regulations and rules to capture all of these, especially as people are using personal Venmo for business transactions or personal PayPal for business transactions.
00;07;21;08 - 00;07;24;07
Danielle Hayden
When does somebody need to send a 1099 and not?
00;07;24;07 - 00;07;44;22
Kelsey Chester
Yeah. And I'm going to say this, that what I'm about to say is true as of the day that we're recording this, the IRS changes their guidelines all of the time. So if you're listening to this in the future, this may not be pertinent anymore. But the IRS is really trying to push these payment processors to issue 1099s themselves to these people.
00;07;44;22 - 00;08;08;24
Kelsey Chester
So if that's the case, if you have a business PayPal or a business Venmo, you shouldn't have to issue the 1099. It should be treated like credit card payments, and Venmo and PayPal will issue the 1099. But if you're using a personal Venmo, I would just cover yourself and just go ahead and issue that 1099. But Cash App, usually that responsibility is on you to file the 1099.
00;08;08;24 - 00;08;23;06
Kelsey Chester
I would say they are not required to. I'm trying to think of a few others like Apple Pay. If you pay anyone through Apple Pay, I would just go in and file that 1099. And if you're unsure if that processor or files 1099, you can usually just look it up on their website.
00;08;23;08 - 00;08;37;01
Danielle Hayden
Perfect. Thank you. All right. Let's dive into talking about the difference between a contractor and an employee. Any anything else on 1099s or W9s that we didn't mention? I feel like you've captured everything, but anything else that you can think?
00;08;37;05 - 00;08;43;18
Kelsey Chester
Yeah, I feel like we did. I think the question now is, well, I don't know if this team member should be an employee or a contractor.
00;08;43;18 - 00;09;04;12
Danielle Hayden
Yeah. I think I say this a lot like the number one question, but this is a major question that we get from business owners and our clients is when is it time to put people on payroll? And I want to say that this is an excellent time to start considering it. I think it's really important to think about that prep now so that you can make really good business decisions between now and year-end.
00;09;04;12 - 00;09;24;20
Danielle Hayden
Everybody is rushing to get to the payroll companies and 1099 and their money teams in December and January. So one, we appreciate you are doing your pre-work. And I know the payroll companies do as well. So if there's somebody on your team that you're thinking about moving to an employee, this is the best time to start that conversation with your money team.
00;09;24;20 - 00;09;47;07
Danielle Hayden
We set up payroll for our clients. We actually just did a really fun Facebook Live with Sarah. Sarah heads up our kind of payroll department, and we talked about our onboarding process, so anybody who's like, oh my God, the thought of payroll sounds completely daunting. I don't know how to even begin that. That is something that we take off of the plate for clients and business owners, so that you don't have to worry about actually doing the setup.
00;09;47;07 - 00;09;57;21
Danielle Hayden
But it takes a little bit of time, and we don't want to be doing it when everybody else is trying to contact the payroll companies in December. So Kelsey, how do we know when it's time to move our contractors to an employee?
00;09;57;26 - 00;10;17;05
Kelsey Chester
Yeah, we were joking on one of our previous recordings in this episode that if you're one of those business owners scrambling in January to get all of your finances ready, that this episode is for you. But yeah, let's figure out if this team member should be a contractor or employee. So guidelines around contractors are basically who has the control.
00;10;17;07 - 00;10;39;12
Kelsey Chester
As a contractor, that team member has the control. So you're just telling them, hey, I need this project done or I need this task done. I don't care when you do it. I don't care how you do it. I just need it done. Maybe by this date. And then the contractor goes and uses their own processes, their own equipment on their own time and gets that task or project completed for you.
00;10;39;13 - 00;11;11;05
Kelsey Chester
They usually invoice you. They should be invoicing you because they are separate from you. They're not associated with your business in any way. They are separate from the business. And then an employee, the employer, you as the business has control of how they do that task or project, what they use. So are they using company computers, company iPad, any special equipment owned by the company? That is more like an employee. If you're working with them on like, a permanent ongoing basis that's geared more towards employee.
00;11;11;05 - 00;11;11;16
Kelsey Chester
I think the
00;11;11;16 - 00;11;32;21
Danielle Hayden
big thing that differentiates it is as soon as you want control, as you build as a brand, you approach a place in your business where you have a specific way that you want things done. And so when you want to start having things completed with your standard operating procedures, when you want things completed according to your brand guidelines, that's usually when we need to start looking at employees.
00;11;32;21 - 00;11;49;15
Danielle Hayden
Also, if you want to be able to give feedback and training or equipment, I heard a client recently talk about how they wanted to take their team on a retreat, and it was a lot of contractors, so how do we kind of hold that that boundary? And now it's different in different states. Some states are more strict than others.
00;11;49;15 - 00;12;02;23
Danielle Hayden
So definitely see your state guidelines. However, I think as soon as you want to start controlling how they do things, you want to be able to give them feedback, you've established yourself as a brand and you want things being done according to that brand, that's the time to really start thinking about it.
00;12;02;24 - 00;12;22;21
Kelsey Chester
That's right. And I think you had mentioned this previously, but who is the expert here? It's kind of like a general way of thinking about it. If that team member is the expert, they're advising you, they're kind of telling you how it should be done, it's probably a contractor. If you're telling the team member how to do it, you're probably the expert and they are probably the employee.
00;12;22;21 - 00;12;46;05
Kelsey Chester
There have been a few times where, you know, a client has explained to me what their role is, what that team member’s role is, and it really is a little unclear, a little more geared towards contractor than employee. In those cases, I recommend erring on the side of caution and making them an employee. You can get in trouble for making an employee a contractor, but you cannot get in trouble for making a contractor an employee.
00;12;46;05 - 00;12;57;08
Kelsey Chester
And there can be serious repercussions. If you were to ever get audited and you're paying somebody who's a contractor and the IRS deemed, actually, they should have been an employee this entire time, it can be very costly for your business.
00;12;57;14 - 00;13;06;02
Danielle Hayden
Yeah, absolutely. What are some of the other benefits of making somebody an employee? And why do small business owners want contractors?
00;13;06;02 - 00;13;25;14
Kelsey Chester
Well, yeah. So for contractors, it's easier and it's cheaper. You know it doesn't have to be a heavy lift to have an employee. But if you don't know that or you just don't want to deal with it, then you don't-there's no real paperwork other than a W9 for a contractor. And to pay them, all you do is just send them a payment via Venmo or check, whatever it may be.
00;13;25;14 - 00;13;32;18
Kelsey Chester
It's super easy and they keep the whole amount. So for ease and convenience, people like to be a contractor. However-
00;13;32;18 - 00;13;50;25
Danielle Hayden
Can I add one more thing? I think the other request I've seen from people that contractors want to be taxed as a 1099 so that they can take some tax deductions. So sometimes it's a request by that individual so that they can tax plan for themselves. They have things that they want to take as a tax deduction. So sometimes that is a scenario.
00;13;50;25 - 00;13;57;20
Danielle Hayden
And if they really want to be a contractor then we need to watch how we're speaking to them and what projects we're having them do and how we treat them.
00;13;57;24 - 00;14;20;20
Kelsey Chester
You'll have to structure their role so that they are indeed a contractor to protect yourself, protect your business, and there are a lot of opportunities by making them an employee. You can offer benefit, which helps with retention. You don't have to keep getting new team members and creating new processes and stunting the growth of the business. It really is a chance to grow your team on a long-term basis.
00;14;20;23 - 00;14;23;05
Kelsey Chester
So not just benefits, but perks.
00;14;23;06 - 00;14;44;20
Danielle Hayden
I think the big one is training, right? Like being able to grow and develop and give feedback, give training. You know, you might want to be able to require a uniform depending on what your business is. Again, standard operating procedures, you want to be able to give them some guidelines for them to work with. Then for the employee, it can be the option for benefits, 401K, PTO time, when you're ready.
00;14;44;20 - 00;15;00;09
Danielle Hayden
I do want to be clear. This is a question that we get a lot, just because you hire an employee. Like if they're working for you part-time, they're a part-time hourly employee. You do not have to give benefits. So don't let that be a barrier. Like, I can't bring on employees because I can't afford benefits. You do not have to pay them benefits.
00;15;00;13 - 00;15;19;29
Kelsey Chester
Yes, every state's guidelines are a little bit different regarding benefits, so reach out to your state and look at the guidelines. But I don't know about any state that require part-time benefits. I know California is a very employee-leaning state, so they do have some requirements for benefits or full-time that most do not require.
00;15;20;04 - 00;15;38;12
Danielle Hayden
I think there's a few other states that do, I think New Mexico, Colorado, they're leaning towards the employee. So definitely depending on where you live, look at it. We use Gusto for payroll with all of our clients. We absolutely love Gusto. And when we do your payroll setup, Gusto will walk you through all of your state requirements.
00;15;38;12 - 00;15;55;23
Danielle Hayden
And so we will make sure that that's communicated to you. If you're setting up your own payroll, make sure you're talking to that payroll company and understanding the state's regulations and guidelines. Anything else that you want to leave the audience with that are the most important reminders that they need to take away from this episode?
00;15;55;25 - 00;16;22;13
Kelsey Chester
I think first and foremost, collect your W9s. A lot of the time, those are very telling in whether you are required to issue them a 1099 at the end of the year and then just track throughout the year who all you are slated to issue that 1099 for, just so you're ready. It can be time-consuming, especially if you're, you know, doing your own DIY bookkeeping or don't have an accounting software keeping track of the total of those payments for the year, so that everything is already kind of done for you by the end of the year.
00;16;22;13 - 00;16;40;01
Danielle Hayden
Yeah, talk to your money team. I know we say this a lot, but contact your bookkeeper, your CPA, have this conversation with them. If you're leaving this conversation unsure, contact them. Talk to them about your very specific situation. If you are ready to bring on employees, if you're ready to take that leap, next step, don't let fear stand in your way.
00;16;40;01 - 00;16;52;00
Danielle Hayden
There are teams out there to be able to help you and support you in getting that set up, so ask for help. You do not have to be a superhero. You don't have to do it all on your own. Take off your superwoman cape and ask for help.
00;16;52;01 - 00;17;07;02
Kelsey Chester
That's right. You don't have to do everything yourself and that is just not where your time is best spent. You stick to what you know best, and bookkeeping and accounting, this is something that is a very easy, I want somebody else to deal with this because they could just do better and faster than I can.
00;17;07;03 - 00;17;28;17
Danielle Hayden
Yeah, absolutely. I joke you don't want me in Canva and we don't want you in QuickBooks. All right. Well, for all of our listeners, thank you so much for being here. I hope today's episode was valuable. If you need help, please go to Kickstart Accounting Inc.com. You can book a call. You'll talk to Kelsey, Aubrey, or myself. You can always send us a DM at Kickstart Accounting on Instagram.
00;17;28;17 - 00;17;44;12
Danielle Hayden
We manage all of those direct messages so you can message us there. We are going to continue to show up for you and be a free resource for you and your business. As a business owner, if you have content that you want to hear, shoot us a DM or make sure that we answer those questions, and don't forget to like and subscribe.
00;17;44;12 - 00;17;54;09
Danielle Hayden
I don't want you to miss out on anything. We built out our content calendar for the rest of this year, and I am really stoked about everything that we have coming your way, so I don't want you to miss a thing.
00;17;54;14 - 00;18;28;04
Kelsey Chester
There are definitely some very exciting things coming, so be sure to subscribe!