Understanding the 1099 Process

As a business owner, it's important to understand the tax implications of your hiring decisions. Specifically, the 1099 process is something you should be familiar with in order to ensure compliance with the IRS and other tax agencies. 

In this article, we'll cover what 1099s are and how to report them, as well as the best practices to follow when it comes to gathering your filing information and meeting deadlines. 

The 1099 process can be daunting for employers, and getting contractors to fill out the W-9 form can be especially challenging. Lawyers often provide their EIN on their invoices which is helpful, but otherwise providing an available PDF form can be useful. You can also invite the contractor to fill out their W-9 information inside QuickBooks Online, though this has less than 50% success rate. If you don't have the necessary tools for a secure document signature, then you may need to resort to mailing out a physical form via the USPS.

What Are 1099s?

A 1099 is a tax form that is used to report non-employee income other than wages, salaries, and tips, to the IRS and states. Recipients of 1099s are usually freelancers, independent contractors, and other businesses. The form is used to track how much money an individual or business was paid for certain services and is typically sent out to the recipient and the IRS at the end of the fiscal year. 

When are 1099’s Due?

The due date for 1099s is January 31 for federal filing, and most states follow the same deadline. However, states like New York and Vermont do not require 1099s unless state income tax has been withheld. Make sure to send out the recipient copies (Copy B and Copy 2), as well as a 1096 if you are filing paper returns. If filing electronically, no 1096 is required. 

How to Gather Your Information and Report 1099s

When it comes to filing 1099s, it’s best to get started as soon as possible. Aim to have the majority of your 1099s sent out to recipients by Week 3 of January, so that you have plenty of time to make adjustments before the final deadline of January 31st.

If you're bringing a new vendor onboard, make sure to ask them for a completed W-9 and a Certificate of Liability Insurance before you issue payment. This is a common requirement and can help you avoid having to chase the vendor down in January. It's also a good idea to hold back payment until the necessary documentation is received. 

Completing a W-9

The W-9 form requires certain information - the name that shows up on the tax return, any doing business as name, the vendor's entity type, address, account numbers, social security number or EIN, and a signature. Any LLCs or C corps do not need a 1099. If a contractor balks at filling out the W-9, explain to them why you need the information, and if they still refuse, make sure you document that you made a good faith effort to retrieve the information.

What to Do with the Completed W-9

Once you have a completed W-9, it's a good idea to attach it to the vendor record within the general ledger system for future reference. In QuickBooks, that would be in the vendor portal under “edit” where you can add attachments. Additionally, make sure to update the vendor record with the EIN and have all fields ready to go with the correct address so that the 1099 gets to where it needs to go. If you file a 1099 without the EIN or social security number, you may get a warning letter from the IRS but there is no penalty.

Reviewing Information

Once you have all the necessary information, it's time to review it and make sure everything is in order. We recommend using the 1099 wizard within QuickBooks Online (QBO) to verify your vendor selections and account mapping. The wizard will help you make sure you're selecting the correct information for the 1099s. 

Filing 1099’s via QuickBooks Online

1. Navigating to the 1099 Wizard: To navigate to the 1099 wizard, open the vendor center in QBO, and click the 'Per 1099' button on the top right. The first page will ask you to verify your company info, so make sure to check your company name, legal address, and EIN. 

2. Selecting Accounts: On the next page, you'll be asked to select the non-employee accounts. Make sure to check all applicable accounts, such as repairs and maintenance, professional fees, commissions, and leasehold improvements. You'll also be asked to select rent, but the wizard will usually do that automatically. 

3. Viewing Report: After you've selected all the accounts, you'll be able to view a report of all the vendors who need a 1099 and the amounts due. If any vendors are missing, you can click 'Add from Vendor List' and check them off. 

4. 1099 filing process: Once you've verified all the information, you can choose to handwrite your 1099s on special 1099 paper, or use QBO to file. You can also use a third-party app to file your 1099s. 

Common Questions

Can an employee receive a W-2 and a 1099 at the same time?

While this could be seen as a red flag by the IRS, it is possible for an employee to receive both forms if the 1099 income is part of an employment arrangement.Having employees that have a side business on the side can often raise questions about their employment status. If the employee has evidence to show that their side business is a bona fide business, they can get a 1099 for the work

What is a Bona Fide Business? 

A common example of this is with employees who offer cleaning services on the side. If they are only cleaning the office and have no other clients, then their income should be employment income. This should be separated on their wage statement as being for cleaning. If they don't have other clients or liability insurance, then it is a red flag that they should be treated as an employee.

Should I pay catering staff as contractors?

When it comes to paying employees, it is important to note that even if someone only works for you once or twice a year, they should still be paid through the restaurant payroll. This is because it is part of your normal business activity. The IRS has a handy chart that helps to determine if an individual is an employee or independent contractor. This has to do with the level of control you have over the employee, as well as whether or not you are telling them where to be and what to do.

Getting Help

If you find the 1099 process overwhelming, don’t hesitate to reach out for help. There are plenty of experts available to assist you in gathering and verifying your information, as well as communicating with vendors and managing the filing process. 

How can restaurant consulting help your business?

Running a restaurant isn’t easy, and it’s even harder to run a successful restaurant starting from the ground up. Take some of the pressure off and lean on experienced professionals to handle some of the work.

A restaurant consultant provides a range of services that can help you get your restaurant off to a strong start and continue to grow successfully. The nature of these services depends on your business needs. They might be geared toward a new launch or expansion, saving a failing business, or a range of other scenarios.

What are restaurant consulting services?

There are several services a restaurant consultant can provide to improve business at your restaurant.

Strategic Planning

Strategic planning is the first step to achieving your business goals. A restaurant consultant can help you analyze your current situation and then identify your short-, medium-, and long-term goals. After conducting research on your market and competitors, you can implement a detailed strategy for how to reach your goals, including a realistic timeline, the necessary finances, and a way to measure your progress.

Financial Planning

Financial planning is a critical practice for your restaurant business. A consultant can help you develop an understanding of your company’s current finances in terms of income, expenses, assets, liabilities, and profitability, and use this data to determine your financial standing in the future of your business. From there, you can make any necessary adjustments to get your restaurant on right track to increase your profits and monitor your progress.

Operational Consulting

Operational consulting can help to improve the day-to-day operations of your restaurant. A consultant can help by analyzing your processes from start to finish. Then you can optimize them to make them more efficient and track your company’s progress while implementing your new plan.

Menu Development

Menu development aims to maximize profits, minimize waste, appeal to your customers, and set your restaurant apart from the rest. A restaurant consultant can look at your menu and help you figure out which menu items are the most popular and which ones aren’t generating much income. Then adjust your menu to create customer loyalty and increase your profits.

Marketing and Branding

A consultant can help you establish a recognizable brand identity for your business for effective marketing. Together, you can create a unique brand logo and slogan and determine who your target audience is. Once you figure that out, they can help you market your services using social media, email, and advertising, and develop a strategy for how to increase awareness of your restaurant to attract customers.

Customer Service Training

It’s important that your staff interacts with customers in a friendly and professional way that’s true to your values as a business. A consultant can help you train your staff to handle issues, should they arise, and teach them how to provide your customers with a positive experience during each visit to your restaurant.

Why You Should Hire a Business Consultant

Restaurant consulting services can help your business in several scenarios. Whether you’re expanding your restaurant business, you need help increasing your sales, your staff needs some extra guidance, your operations or menu are costing you money, or your restaurant needs a complete turn-around, hiring a restaurant consultant can help you make your business more efficient, profitable, and successful.

How a Good Accountant Would Have Saved "Bad Vegan" Sarma Melngailis

If any of you spent the last couple weekends on the couch recovering from a long week, you’ve probably been watching Netflix’s wild true crime documentary “Bad Vegan,” which checks all the boxes: Cult of Personality, Fraud, Gambling, Angels, Domino’s Pizza, & Accounting.  

The story is about the owner of a Union Square based Vegan restaurant called “Pure Food & Wine Restaurant” owned by celebrity chef, Sarma Melngailis. A popular haunt among weird celebrities, the restaurant enjoyed a significant amount of financial success in its first years, despite being highly leveraged due to a costly partner buyout. At one point Sarma is bringing in nearly $7m a year in gross revenue. Things start to take a strange turn when Sarma starts dating Anthony Strangis- a man she met on twitter and deepened her relationship with on Words with Friends. I won’t spoil the plot, but Sarma ends up handing over $1.7 million to Anthony Strangis and leaving  the government, her employees, and investors out in the cold to the tune of $6.14 million. 

By the time the credits are rolling, I am actively yelling “Where the #$%! Is Pure Food & Wine’s accountant?!?!?!” Perhaps the most vexing question that this show doesn’t ask. Sarma has a number of investors even taking on ANOTHER round of investment in the midst of this scandal. The fact that investors took Sarma’s word after being burned once is absolutely galling. The fiscal irresponsibility here is stunning on so many levels.

So, this begs the question: “How could a good accountant have helped Melngailis avoid this entire fiasco?”

Note: When I say “accountant,” I don’t mean that guy you see once a year to do your taxes. That’s a CPA or EA. An accountant (or bookkeeper) is someone who records all your financial transactions for the other 364 days of the year. It's an important distinction. If you don’t have one of those… well… watch Bad Vegan. 

The famed vegan “lasagna”

Adhering to the Operating Agreement

An operating agreement is the constitution of your business. It sets the rules for how the business is run. It's a critically important document that discusses who’s in charge of the books, who runs the business, and how the profits get split up. It’s noteworthy that she had investors, as that usually means that there is some sort of breakdown of how the profits are split up (usually by a percentage of the total money invested in the business).

Rich folks & banks don’t just give you a wad of cash because they enjoy your vegan lasagna (which by the way, looks horrific). They invest because they want a return on their investment. In short: they want to make money. Investors also don’t appreciate it when they see one partner of the business making significantly more than what the operating agreement says, which is what makes this story so strange from an accounting perspective. If the investors were receiving regular reporting from the accountant, they surely would have noticed this massive discrepancy. Which brings me to my next point…

Regular Reporting

Part of having investors is keeping them informed of what is going on with the business. Operators don’t generally like having someone else have a say in their business. However, unless the operator has enough cash on hand to open the business themselves, that’s just the way it has to be. One of the worst things an operator can do is try to keep an investor in the dark. It's the easiest way to get yourself booted out of your own restaurant, or be sitting across the table from an attorney from a law firm that costs $3,000 an hour. 

Operators should be closing books on a monthly basis, and reporting the performance of the business on a monthly, or at least quarterly, basis. Even better, there should be a regular meeting with investors to answer any questions or concerns they may have. Although these investors' questions you may find uncomfortable, it’s certainly  better than facing down the investor’s version of Thor’s Hammer: their attorney James from Pavalock-Bagarose-Pikula-Whitney & Hammersmith. An internal or external accountant can prepare these investor documents on a regular basis, and when Sarma’s distributions started to pull away from the rest of the partners in relation to her percentage of ownership, red flags should have been going through the roof. 

Control Over Cash Flow

Possibly one of the best things that a business with investors can do is to have a 3rd party responsible for cash flow. It takes the temptation away from operators to spend, or to focus on the cash flow, and instead focus on the operations of the business. It's a very freeing prospect to operators, and it's a comforting setup for investors knowing that the money is in capable hands.

Fiscal Responsibility

Throughout the series, viewers watch Sarma initiate dozens of wires, ranging from $10,000 to $190,000 per wire. Part of the job of an accountant is to keep track of the support for financial transactions. The IRS requires proof of all transactions over $75 which these wires most certainly were. An accountant would have discovered that these transactions were being sent to either the casinos or to Strangis himself, and like the Kool Aid man, James from Pavalock, Bagarose Pikula Whitney & Hammersmith would have been kicking down the door to Pure Food & Wine Restaurant. 

It is also worth noting that accountants have a fiduciary duty to report any accounting irregularities to investors, or to the government. Frequently, when you see a whistle-blower case, you’ll note that the employee is an accountant. 

Antony Strangis’ “Power Meeting” would not have worked

There was this one bizarre moment in the series when Anthony Strangis (now Sarma’s husband) says that he has taken over the company, that the investors have been paid off, and that all decisions need to go through him. His confidence seems to at least reassure employees enough for them not to question it. Had an accountant been in the room, the meeting would have gone over as well as a screen door in a submarine. The accountant would have had so many immediate questions that would require proof that would have turned Anthony’s plan to dust. 

• “Where is the purchase agreement?”

• “How were the other investors paid? Please provide proof”

• “Where is the new operating agreement?”

Any one of these questions would have an immediate impact. Accountants are a fickle, and distrusting type, and we don’t take anything at face value. It’s nothing personal, but its reasons like this that we have this distrust so deeply entrenched.. 

Sarma Melngailis ended up costing the government, employees and her investors over $6 million. This all could have easily been avoided had she just hired an accountant. Good accounting can be pricey, but at the end of the day, it's a far lower price than poor accounting, or no accounting.

How to do bookkeeping for a small restaurant

When it comes to owning a small restaurant, it takes more than simply creating delicious food to ensure your business succeeds. What about the backend side of things? You know, the business admin and bookkeeping? Even the smallest of restaurants need to keep an eye on their accounts to effectively manage the day-to-day finances of their business and track any profits they’re making while knowing where to make any future improvements.

Here are the first steps you should take to get you started.

Consider how you will keep your records

Depending on your budget, there are various ways that you can keep your books, ranging from setting up your own spreadsheet to hiring a professional team of accountants who provide restaurant bookkeeping services and can do all of the hard work for you.

Know what bookkeeping tracks

In short, if you’re doing your own bookkeeping, you need to track each of these things:

• Sales: How much money is going into your till

• Cost of food and supplies: How much money you’re spending on food for your menu

• Labour: How much money you’re spending on staff labor

• Inventory value: The monetary value of the stock you are holding at all times

• Fixed costs: These are usually regular outgoings, such as rent and waste disposal

• One-off costs: Anything unexpected that you’ve spent money on 

Accounting ratios

To work out where there is room for improvement at your restaurant, you should create monthly profit and loss statements using the information above. You can then use the following formulae to determine future business strategies:

• Gross profit = sales – cost of goods sold

You can use this figure to create sales targets

• Gross profit margin = (gross profit / revenue) x 100

You can use this figure to help set prices on your menu

• Operating profit = gross profit – operating expenses (including labor, fixed costs, one-off costs)

This is the amount left over after all operating costs are taken from gross profit

• Net profit = operating profit – taxes and other expenses

Ultimately, this is the figure you need to focus on to determine whether your restaurant is making money or not.

Tips for small restaurant bookkeeping

It can seem pretty overwhelming at first, so here are our top tips to bookkeep efficiently:

• Keep track of every payment, including all of the dates they were made

• File bank statements and invoices in order, so you have them on record, and they are easy to locate when necessary

• Be strict with creating monthly profit and loss statements

• Consider hiring a company to do your bookkeeping for you, which will, in turn, free up your time, so you can concentrate on growing your restaurant business

It’s perfectly understandable to want a team of qualified accountants to look after your books for you, especially if you’re a chef with a passion for delivering mouth-watering meals or a restaurateur with a desire to mingle with diners front-of-house. Of course, hiring professional bookkeepers also reduces the risk of error when it comes to your financial recordings. 

If you’re a small restaurant owner, then get in touch with PrixFixe. Our friendly team of experts provide accounting and bookkeeping services, specifically for businesses within the hospitality industry.