1099 Question - Items not paid direct to Contractor

[EKnobil]

I'm trying to figure out the best way to handle a contractor payment situation.

Some of our college professors are independent contractors. We pay for child care, but pay it directly to the care provider.

What's the cleanest way to include that expense on the professor's 1099 form, even though it is paid to someone else?

Thanks!

[LauraG]

The 1099 will only reflect payments by vendor. You would have to code the payment in Peachtree under that professors name for the totals to be correctly reflected on the 1099.

You could a) make out a manual check payable to the child care provider but code the Peachtree payment to that professor. OR
b) make the payment and check to the professor for him/her to endorse over to the care provider.

[EKnobil]

Thanks for confirming my fears, Laura. Also, thanks for the quick response!

Let me bounce something off you (or anyone): How 'bout posting two payment invoices to the professor, one for the child care amount (so it will hit their 1099), and a negative one to cancel it out, crediting an account we will actually pay the provider from (that will not show up on a 1099). Then I could enter another invoice to pay the provider. Make sense?

[LauraG]

IIRC, the 1099 picks up payments i.e. cash disbursements and not payment invoices. I would pull up one of the sample companies and experiment to see if you get the results you want. I would also check with your accountant to see how you should be treating this child care benefit wrt whose rightfully should be getting the 1099.

[EKnobil]

Thanks for the tips, Laura! I'll both ask and try.

I'm curious, though. If the 1099 is only based on disbursements, how does it use the list of which accounts should be included on the 1099?

[LauraG]

Go to Maintain>>Default Information>>Vendors. On the 1099 Settings tab you can specify by GL account what box (1, 7 or none).

In the help file it says:
"1099-MISC, Box 7 Only: Select this option to report miscellaneous income for each contractor you pay more than $600 annually. Peachtree will then make miscellaneous income calculations for all contractor payments credited to the chosen general ledger account."

To me, it sounds like Peachtree is using the credit side of the payment for each vendor. This is typically only going to pick up the amounts in your cash account to isolate the payments made. This makes sense since the calculation of the 1099 amounts are on a cash basis even if the company is on a accrual basis.

So technically you could set up a dummy cash account to pay vendors "cash" to avoid having the payments from being included in the 1099. But in your case you are trying to get disbursements made to a third party (care provider) to show up on an ICs 1099 which does not sound correct to me.

[EKnobil]

I assume the correct way to handle it is to pay the extra to the professor (and include it on their 1099), and have them pay the caregiver directly (and issue a 1099 to the caregiver, if $600 or more).

We are just facilitating the cash transfer, since the caregiver is one of the students in our College. I realize this may not be technically correct, so we will kill the idea if our auditors balk at it.

[Lisa_p]

I would definitely vote for the "pay everything to the professor" route, but run it by your accountants/auditors and see what they say.

Another issue to think about is the contractor relationship. If you're paying "benefits" for them, then should they be employees rather than contrators?

[LauraG]

Lisa, that is a good point. I used to work at a school and the DOL ruled that all teachers were employees mainly because the school dictates where & when the teachers conduct class. The fact that they are receiving benefits really sounds like employees to me too. Another thing to ask your CPA.

[EKnobil]

Lisa/Laura, Thanks! We'll have to look at the employee issue. Hadn't thought of that. In our current circumstance, our auditors confirm that this should count as 1099 income to the professor.

I will do a FY close soon, and can then see if my attempt to trick Peachtree into putting the payment on the professor's 1099 really works.

[LauraG]

You can run your 1099 reports anytime during the year. You don't have to wait until your FY close.

[EKnobil]

Since we don't use Peachtree payroll, I haven't closed any payroll years in this newest company (created in 2004). When I go to run 1099s, it only gives me 2004 and 2005 as options. I assume I need to close the 2004 payroll year to get it to offer 2006 as an option. I assume I need to also close the 2004-05 fiscal year, but that's not a problem because we should now (finally) be ready to close the 04-05 year, too. (We just completed our audit of 04-05. It's a long story.)

I really appreciate all your help!

[EKnobil]

Just FYI, the trick worked. I entered a vendor invoice to pay the professor for the childcare expenses. I then entered a negative invoice of the same amount, crediting an account (reimbursements) that isn't included in the 1099 calculations. I then used that same reimbursements account as the expense account to pay the child care provider. This way the child care expense is included on the Professor's 1099, but not on the 1099 for the child care provider.