My payroll provider (eg TriNet, Gusto, Justworks, Rippling, Sequoia, etc) has offered to file 1099s for free for my startup. Can I use my payroll provider for 1099 filings?

Kruze Consulting Startup Q&A Author
Vanessa Kruze Founder, CPA

Founders often ask us why they can’t just use Your Payroll Provider to report their 1099s, and here are 10 Reasons Why You Shouldn’t Use Your Payroll Provider for 1099 Reporting:

  1. Your Payroll Provider doesn’t capture payments outside of Your Payroll Provider: lets just say you paid Jane Doe, an Engineering contractor in 2019. You paid here a few times by Your Payroll Provider ($15K), and a few times through Accounts Payable, Accounts Receivable, Business Billing and Invoicing Software Solution ($13K) or perhaps bank wire ($100K). Your Payroll Provider will only report the amount paid within Your Payroll Provider, which means that the reporting is incomplete.
  2. Duplication of reporting is possible: now lets say your accountant is also filing 1099s, either for the full amount paid to Jane in 2019 ($128K) or for the balance that was not reported by Your Payroll Provider ($113K). Now both the IRS and Jane are super confused, and the potential tax liability is huge. The IRS sends notices to the company and to Jane, demanding that taxes be paid. Everyone is freaking out (!!) and will cost you hours of headaches and heartache to fix.
  3. Your Payroll Provider’s List is incomplete: the 1099 list within Your Payroll Provider is without-a-doubt incomplete: are you sure you paid every person who needs a 1099 through Your Payroll Provider? Your landlord? Your lawyer? Your accountant? The interest on the convertible notes?
  4. Your Payroll Provider doesn’t capture the vendor agreement/contracts: the IRS requires that you keep a signed contract with your vendors detailing the scope of work performed and agreed upon price. This is one of the very first things an IRS auditor examines during an Audit.
  5. Your Payroll Provider doesn’t capture the bills/records: the IRS also requires that you keep documentation for 3+ years around each bill that is paid hat scopes out the deliverable and time period covered. If you’re making regular payments to a contractor, its essential that these bills are stored. Storing them on email, Box, or as attachment within QBO/Netsuite is still a hot mess, so be sure to use a bill payment processor like Accounts Payable, Accounts Receivable, Business Billing and Invoicing Software Solution that seamlessly tracks the bill, the payment, and the approval process.
  6. Your Payroll Provider doesn’t capture International W8s for International folksYour Payroll Provider only processes domestic payments, and in this day and age… everyone has international contractors. Talent knows no borders. The IRS requires that you track W9s for domestic contractors, and W8BENs for international contractors. So if even if you’re using Your Payroll Provider for all your domestic contractors and using only that system to pay them, as well as storing supporting docs in Box, you’ll still need to use another system to track W8BENs for your international contractors.
  7. Your Payroll Provider doesn’t capture 1099-INT: When people talk about 1099s, they are most often referring to 1099-MISC forms, which report non-employee payments for services. But there’s actually a whole suite of 1099 forms, including 1099-INT (interest payments) and 1099-C (debt cancelations). The most common type of transaction that startups need to report on outside of 1099-MISC is 1099-INT for interest accrued on convertible notes. Your Payroll Provider doesn’t cover this.
  8. Your Payroll Provider doesn’t capture 3921s. Form 3921 is also part of the 1099 series and is used to report the exercise of Incentive Stock Options. If you’re a startup, you very likely issued ISOs. If you have Carta to help manage your cap table, they may or may not be reporting 3921s on your behalf. Contact them to be sure, or have your accountant file them. Either way, Your Payroll Provider doesn’t file these.
  9. Your Payroll Provider doesn’t capture Non Qualified Stock Optionsif you compensated contractors with NQSO’s, you’ll need to report that value on a 1099-MISC.
  10. Your Payroll Provider doesn’t send paper 1099s: Granted, I’m not a fan of paper anything for many reasons. But there are some folks out there who are deeply distrustful of having their SSN transmitted online in any fashion, or perhaps they are unwilling to give out an email address so that the data and forms can be transmitted electronically. In this case, you’ll need a system of record that can do a paper 1099, and thats not Your Payroll Provider.

To reiterate, there are many great payroll processors out there: Gusto, Rippling, Trinet, Sequoia, to name a few… they’re just not a good solution for bill pay or 1099s. We’ve worked with well over 1000+ startups and found that Bill.com. is best for bill payments, and Track1099 is best for 1099s.

As a side note, I’d like to mention that the 1099 process is… awful. Literally the worst, its death by papercut. The amount of data and coordination that needs to happen between the company, vendor, and the IRS is intense and our least favorite part of the job. We’re not trying to drum up more work here by taking away a job from your payroll provider, it’s just that we’ve witnessed first hand the repercussions from letting payroll companies file 1099s without an accountants input. Please be sure to turn off your 1099 reporting in your payroll provider and have your accountant file a complete an accurate 1099 series on Track1099.

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