Running contractors? Need guidance on picking the best 1099 payroll software to stay compliant? This guide has you covered.
Between growing independent contractor workforces and updating tax laws each year, it’s vital that your business has a reliable way to handle contractor payments and year-end taxes. That all starts with 1099 payroll software.
Here’s the issue:
1099 payroll software solutions aren’t created equal. Use poor software and you open yourself up to missed deadlines, IRS penalties, and frustrating days spent remedying avoidable mistakes.
The good news is that once you know what you need from payroll software, picking the right solution is pretty simple. The features you need to look for when evaluating your 1099 software options are outlined below.
What you’re going to learn:
- Why you need a rock solid 1099 Payroll software solution
- Contractor Onboarding
- Payment Processing Flexibility
- Automated 1099 Form Generation and Filing
- Automatic features that save you time and money
- Compliance features to keep your business safe
- Wrapping everything up
Why you need 1099 Payroll Software
1099 processing isn’t going away.
According to the Bureau of Labor Statistics, independent contractors make up 7.4% of total employment in the US as of July 2023. That’s 11.9 million people. With more businesses offering freelance contracting gigs, there’s no escaping that you’ll need 1099 payroll software to manage it all.
Think about what happens if you don’t have your act together.
Every contractor you pay $600+ needs a Form 1099-NEC come tax time. File late and you’re hit with IRS penalties ranging from $60 to $660 per form.
With even just a handful of contractors that adds up quickly. On top of that you have the time spent manually tracking, generating, and filing these forms. For large contractor workforces it’s simply not possible without software.
Features Needed From 1099 Payroll Software
Still with me? Now it’s time to dig into the features of a rock solid 1099 payroll solution. As mentioned above, these are the essentials you need to keep your business compliant.
Contractor Onboarding
How do you get contractor information into your software?
The absolute best 1099 payroll platforms allow contractors to upload their W-9 form when they on-board with your company. The W-9 collects their Taxpayer Identification Number (TIN), legal name, and business structure.
Speaking of mistakes…
If your software doesn’t validate TIN numbers and catch misspellings in contractor names you’re asking for trouble. The IRS sends notices for invalid information and may require you to withhold taxes from future payments.
Make sure your software has:
- Electronic W-9 data capture
- TIN validation against IRS records
- Storage of contractor information for future payments
- Tracking of W-9 expiration dates
Payment Processing
Not all contractors want to be paid the same way.
Offering multiple payment methods is ideal for contractor satisfaction. At minimum make sure your software supports electronic direct deposit, paper checks, and payment cards. Integrated payment platforms like PayPal are a bonus.
Your payment processing should also handle variable payment schedules. Contractors may not earn a regular paycheck each week or month like your employees do. Payments may be project-based, weekly, monthly, etc.
Make sure your software can handle your business model.
Automated 1099 Form Generation and Filing
Had you at “automatic”? Welcome to the club.
Manually generating 1099 tax forms for each contractor is no ones idea of a good time. The right payroll software automatically generates accurate 1099 forms using payment data you’ve already entered.
By December 31st your software should enable you to:
- Automatically generate Form 1099-NEC in minutes
- Review all forms prior to printing/filing
- Print forms for contractor recipients
- Electronically deliver forms to recipients
- File 1099s with the IRS (and state agencies)
That’s hours of bookkeeping work eliminated by leveraging technology.
Automatic Features That Save You Time & Money
Saving time is great but did you know automation can save you money too?
There’s a few features that seem small on their own but add up to huge benefits when executed properly. See if your payroll software has the following automatic features.
Automatic Payment Tracking
Do you remember spreadsheets?
Your software should track contractor payments as they’re processed. There’s no need for manual entry. You’ll always know how much has been paid to each contractor for the year.
More importantly…
You’ll know who has hit the $600 threshold for 1099 processing and who hasn’t. Accidentally filing 1099s for contractors you haven’t reached the threshold with costs time and money.
Likewise. Not filing 1099s for eligible contractors costs money. Automatically tracking payments eliminates these mistakes.
Calendar Alerts
709 days isn’t a lot of time to file 1099s.
Come tax time your software should alert you of impending deadlines (and keep track of completed ones). For Form 1099-NEC you have until January 31st to file forms with the IRS and deliver copies to each contractor.
Ideally…
- You’re alerted if W-9 information is incomplete
- Your software tracks calendar deadlines (filed/unfinished)
- You’re automatically reminded when thresholds are met
- Validation is run to check for incorrect information
One more bonus round…
Integrations
Does your payroll software talk to other applications?
While not a “feature” of the software itself, it’s critical to pick platforms that integrate with your existing software suite. Double data entry is time consuming and prone to human error.
Popular integration options include:
- Accounting software like QuickBooks/Xero
- Payment processors such as PayPal
- Banking information
Compliance Features That Keep Your Business Safe
Payroll software is a small investment compared to an IRS audit.
It only takes one mistake to trigger an audit. Software can prevent many common mistakes through features like the ones below.
State Reporting
Ah yes, taxes at the state level.
Businesses operating in states with individual 1099 reporting requirements need special attention. Some states require you to file 1099s separately, others integrate with the federal program.
Regardless…
You should know what your state requirements are and have a system (software) that accounts for these differences. When in doubt, consult your state’s tax agency directly.
Audit Trail and Record Keeping
Speaking of audits…
Good payroll software creates an audit trail of payments made, forms generated/filled, and filings made. If the IRS ever audits your 1099 filings you’ll want to have this info handy.
The IRS says to keep 1099 forms and filings for a minimum of 4 years after the date of filing. Your software should enable quick retrieval of this information at any time.
Worker Classification Features
Is this person an employee or contractor?
Classification is a big deal. You know your business better than anyone. Software cannot determine worker classification for you.
However…
Many software vendors offer features that guide you with classification and provide good documentation practices. This is important because misclassification can cost you going back.
Wrapping Everything Up
If you pay independent contractors you need reliable 1099 software.
Don’t make the mistake of going with a low-end solution that causes more problems than it solves. Take the features above and use them to identify what you need from payroll software.
To quickly recap:
- Make sure contractors can electronically submit W-9s
- Check your payment processing options
- Ensure 1099s can be automatically generated
- Automatic calendar tracking for payments and deadlines
- Integrations with existing business software
Good luck evaluating your options. Stay compliant and save yourself a headache later!