Some states require businesses to withhold tax from vendor payments (non-employee compensation) and report this withholding on Form 1099-NEC at year-end.

1. Select Financial > Setup > Bank Account.
2. Create a bank account for vendor payments that are subject to state tax withholding.
3. Select Financial > Setup > Chart of Accounts.
4. Create subaccounts in order to track withholding for specific vendors.
5. If a vendor has withholding in more than one state, create subaccounts for each vendor/state combination.
6. Use Vendors > Invoices > Enter Vendor Invoices to enter vendor invoices as usual.
   In the General tab, set the Vendor Compensation Type to Non-employee Compensation - 1099-NEC.
7. For each vendor invoice, enter a credit invoice for the state tax withholding amount, that is, enter a negative amount.
   Use the table below as a guide for field settings in the Enter Vendor Invoice screen.

   Set this Enter Vendor Invoice field	To this value
   Invoice Number	Use the same number as the original invoice followed by _WH. For example, 1001_WH. That way the two invoices display together in the system.
   Invoice Description	XX Tax Withholding (where XX is the state requiring withholding).
   Vendor Compensation Report Type	None
   Distribution tab
   Transaction Type	General Ledger Only
   Cost Account	Select the vendor's state tax withholding account.
   Taxable checkbox	Clear this checkbox.

8. Post vendor invoices as usual by going to Vendors > Invoices > Post Vendor Invoices.
9. Review and confirm the net impact of the original and credit invoice:
   • Purchase amount debited to project cost account.
   • Purchase amount minus tax withholding amount credited to the Accounts Payable account.
   • Tax withholding amount credited to vendor's state tax withholding account.
10. If you route invoices for approval using Vendors > Invoices > Approve Vendor Invoices, exclude the credit invoice.
    After the original invoice is approved, select it along with the credit invoice when you make the payment.
11. Pay vendor invoices as usual using Vendors > Payments > Select Vendor Invoices for Payment.
    • If you send a partial payment for the original invoice, the credit invoice should reflect an equivalent partial payment.
    • If Vendor Payment Controls are set to print one check per invoice, set the original and credit invoice to the same payment group.
    • After paying both invoices, the net impact is a vendor payment for the purchase amount, with both invoices considered paid.
12. Post vendor payments as usual using Vendors > Year End > Post Vendor Payments.
13. Review and confirm the net impact of posting the payment:
    • Purchase amount credited to the cash account.
    • Purchase amount minus tax withholding amount debited to the Accounts Payable account.
    • Tax withholding credit balance remains until vendor's tax withholding is paid to the state.
14. Use the Account Transactions Report to gather vendor tax withholding amounts at year-end.
15. If the vendor has open invoices or retainage held, run the Open Vendor Invoices by Vendor Report to reconcile open amounts with the GL account.
16. Report vendor tax withholding information in boxes 5, 6, and 7 on Form 1099-NEC.