Form 1099 filing requirements can leave any cannabis business owner guessing if they are not prepared. Is this your first time completing the process as a business owner? Have you completed this process in the past and made a few mistakes? No worries, Redbud Advisors explains the 1099 Filing Requirements: Best Practices for Cannabis Businesses. We will break down the IRS forms step by step for you. If you still feel you are better off letting the professionals handle it you can always reach out to us, we are experts in cannabis tax.
To get started, it is important as a marijuana business owner to understand your responsibilities to provide a Form 1099. Let’s start with the basics.
Below we have clarified the difference between a contractor and an employee.
Contractor vs. Employee
For many reasons (mostly payroll taxes), the IRS is concerned that workers are appropriately classified as either independent contractors or employees. The determination of workers is usually done on a case-by-case basis and can include several factors, such as behavioral, financial, and control. This is just another example of why we keep mentioning to classify employees correctly in other blog posts or on social media. Doing this is another step for cannabis businesses to potentially prevent an audit.
Who is classified as an Employee?
An employee is defined by the IRS as anyone who performs services for wages or salary is your employee if you can control what will be done and how it will be done
Who is classified as an independent contractor?
An independent contractor is an individual who does work for another individual or company. The contractor is, by definition, independent, and not an employee of the hiring company. Independent contractors are considered business owners; they report income on their personal taxes and can deduct business expenses. As a marijuana business contracting work from someone you are required to issue a Form 1099. Issuing a Form 1099 is designed to bridge the gap between business expenses being deducted and income being reported.
Who Should Receive a Form 1099?
Now that you understand the difference between a contractor and an employee let's get to the specifics. The list below gives examples of who should receive 1099’s issued from your cannabis business. Anyone who falls into the list below that is paid $600 or more by cash or check.
Independent Contractor
Attorney
Landlord (if paid over $600 in the year)
Freelancers
Vendors (depending on their entity type)
If you are paying anyone via credit card, Cash App, PayPal, Venmo, or some other third-party app you are not responsible for sending a Form 1099. We repeat, only if you are paying in cash or by check will you issue a Form 1099 to the listed people above.
If you do not have Form 1099 on hand or you are not sure where to find Form 1099, A free fillable 1099 form can be found here.
How Do I Get Correct Information To Issue a Form 1099?
A key form your marijuana accountant might request is a W9 form. This is an informational form that rarely goes to the IRS. If your current accountant isn’t requesting this information it is time to start looking for a new accountant. If you do not have an accountant it is your responsibility as the business owner need to request this form. Not sure where to get a W9 form? A free fillable form W9 can be found here.
At Redbud Advisors we occasionally ask our clients throughout the year for a form W9 from independent contractors, freelancers, attorneys, landlords, and suppliers. This will provide the necessary needed information and decision if a Form 1099 needs to be issued.
A Form 1099 does not need to be sent to a vendor who operates as an S-Corp or a C-Corp.
What Information is Needed to Complete Form W9?
Name
Address
Taxpayer identification number (TIN)- either the person's social security number or their Employee Identification Number (EIN)
Type of business; LLC. S-Corp, Partnership, etc.
As a marijuana business owner using or paying for services from someone or an entity defined by the IRS as needing a Form 1099, it is your responsibility to request the completion of form W-9 and keep it on file. If you have a cannabis accountant they should assist you in doing this.
Form W-9 Quick Tips
You are not obligated to confirm the validity of the information provided on form W-9. Unless you know or have reason to know that an independent contractor is not authorized to work in the United States, you can be held liable.
If someone you are doing business with refuses to fill out a W-9 after receiving payment, Redbud Advisors recommends not continuing that relationship anymore or at the very least letting them know that you are obligated to withhold 28% federal tax from future payments.
Is there ever a time someone can rightfully refuse to complete a form W-9? Yes, if you are suspicious about the request. If there is no legitimate reason, you do not need to complete the form.
Another reason someone can refuse to complete a form W-9 is if they are an employee. This would call for them to complete form W-4 instead.
A W-9 form can work both ways- if someone who is an independent contractor is receiving large cash payments form W-9 will provide needed information to complete and file form 8300 on time.
Even the most prepared cannabis business owner can be forgetful. There is always a best practice for even the worst-case scenarios, like forgetting to send a Form 1099.
As an employer, you are required to send 1099’s out to anyone you paid by cash or check no later than January 31 of the next year.
What if I Forget to Issue a Form 1099?
As a business within the cannabis industry where it seems like tax audits are lurking around every corner you never want to attract negative attention to your marijuana business. Failing to file 1099’s to contractors is considered a violation of IRS regulations and unwanted negative attention. The IRS will not penalize companies for honest oversights or omissions.
If you are found to be paying under the table and intentionally fail to provide a Form 1099 there will be heavy penalization. The minimum penalty is $50. total penalties for the calendar year could total as much as $500,000 depending on the size of the business. The IRS also imposes penalties of up to $100 per incident for missing the deadline and filing late. It is a good idea to always utilize a reminder to send Form 1099 out in enough time for delivery to be on time.
As an employer, you are required to send 1099’s out to anyone you paid by cash or check no later than January 31 of the next year.
Conclusion
Is the process to file a Form 1099 for an independent contractor easier than you thought? Have you been following best practices? If not, now you know the process and the importance. Now is the perfect time to follow Form 1099 best practices moving forward.
Redbud Advisors always recommend having all contractors complete a form W-9 before issuing any payments and filing the form so it is accessible. To avoid penalties that can be very costly make sure to have all 1099’s sent out by January 31.
We encourage you to reach out to us for all your cannabis tax needs. Redbud Advisors is a full-service cannabis tax firm assisting cannabis business owners in all legalized states in the US. Give us a call today at 866-830-5144 or you can always visit us online at www.redbudadvisors.com.
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