Should You Outsource 1099 Preparation Next Year?

December 19, 2018

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By Pam Miller, APMD

When you conduct a post-mortem of your 1099 prep process this year, you might seriously consider outsourcing your 1099 processing. There are vendors ready and willing to take over this task for you at a reasonable price.

The questions to consider are: What exactly does outsourcing 1099 prep get you? Is it a good idea? And does it really alleviate a lot of work for AP?

What Goes Away, What Stays?

Outsourcing 1099 prep can’t eliminate all of the work that AP must do. AP must still assess new suppliers as they are being entered into the system to determine if they will be 1099 reportable. If they are reportable, AP must request a completed W-9 from the supplier.

Testing the information supplied on the W-9 with the IRS's TIN matching system is one more step that should be accomplished prior to entering the vendor into the system. Outsourcing this step is acceptable to the IRS, and having a 1099 outsource vendor perform the TIN matching can eliminate this step for AP and add a level of verification.

There's Always a Time Crunch

When outsourcing, AP must create a file that contains the list of reportable vendors. In addition, AP must supply their addresses, TINs, and the amounts that are to be reported for the tax year. This file is provided to the outsourcing vendor by an agreed-upon date.

The agreed-upon date by which the file must be provided to the vendor is often in early to mid-January. Many AP departments work on their 1099 files until the last minute, and these deadlines can cause AP departments significant stress unless the work of creating the files is done earlier.

How Much Should Outsourcers Do?

The preparation of the actual 1099 documents, such as the printing and preparation for mailing, can be an onerous task for AP departments. Even small AP departments can send out hundreds of 1099s. Eliminating the last minute rush to print and mail is attractive to many AP departments—especially around January 29, when the office printer breaks down or the form order is short or incorrect.

But what about the TIN matching or supplier vetting that some outsourcers provide? Does it make sense to allow a third party to take on these responsibilities? The answer to this question depends on each AP department’s philosophy on managing the supplier file. Certainly, for those departments that do not have the capacity to do much research on new suppliers, or for those who are unable to implement the use of the TIN matching system, outsourcing these processes can and will increase the quantity and quality of information contained in the supplier file.

However, for those AP departments whose supplier file management activities already include TIN matching and other steps to vet the supplier, outsourcing these tasks may strike some as a loss of control.

Another issue to consider is turnaround time. How long will it take the outsourcing company to provide the needed information compared with the time it takes to process the information in-house? Also, during your supplier set up, is it worth it to sacrifice entering complete information into the system in order to wait for an outsourcer to complete the entry? It probably is not a good trade-off.

Calculating the Costs of Outsourcing

Calculating the cost of sending out the 1099 documents is relatively straightforward. Simply add up the cost of the forms and the postage. Then add in the labor costs incurred with the printing and mail prep.

Compare this total to the fee the outsourcer is proposing. In many cases, the outsourcer can provide this service at a cost close to, or even quite a bit less than, the cost of performing these tasks in-house. Because the value proposition can be so clearly determined, this is often the only part of the 1099 reporting process many AP departments outsource.

Determining the value of outsourcing the TIN matching process is a bit harder to calculate. The time spent to actually perform the match is only a small portion of the process. Obtaining the W-9 and contacting the supplier if the match fails is where real staff time is invested. However, if the choice is between outsourcing the TIN matching and not TIN matching at all, the benefits of having the TINs verified through the IRS’ system are likely to outweigh the cost.

1099-Related Functions Are Closely Intertwined With Supplier File Maintenance

Ultimately, your outsourcing options come down to this: If you are looking to outsource more of the 1099 process than prep and mailing, the cost and value calculation becomes complex. Tasks such as researching supplier information, contacting suppliers to request the W-9, performing TIN matching, and actually entering the information into the system need to be carefully evaluated. Once evaluated, a determination must be made as to what is possible and desirable to outsource and what should remain in-house.