Did you know, misfiling your 1099 Forms carry a substantial penalty? Next month is the due date for their timely filing. Now is the perfect time to review your vendors in your accounting software while there's still time to gather any missing information to ensure you are ready for filing.
A 1099 form is an informational return to report certain types of non-employment income to the IRS including interest, dividends, retirement, government payments, sales, and more.
New for 2020 is the Form 1099-NEC, one of many variants of the Form 1099. The Form-1099-NEC is to be used for reporting payments for non-employee compensation. For each person, not an employee, to whom you have paid at least $600 during the year for services performed (including parts and materials) you should file a Form 1099-NEC.
The 1099-NEC form is due January 31 in the year following the applicable tax year. If January 31 does not fall on a business day, the due date will be moved to the next business day. The due date for 2020 forms will be Monday, February 1, 2021. The due date is for both to furnish the payee copy and to file a copy with the IRS.
The 1099-MISC form will still be used to report rent payments and payments to an attorney. For the 1099-MISC, the copy to the payee is due February 1, 2021, and the copy to the IRS is due March 1, 2021 if you file on paper, or March 31, 2021, if you file electronically.
You can request a 30-day extension by filing Form 8809 by the applicable due date listed above. For 1099 forms, other than the 1099-NEC, a 2nd 30-day extension may be requested by filing a paper Form 8809 before the original 30-day extension has expired. We highly recommend using certified mail with return receipt requested whenever mailing to the IRS.
You may use a Form W-9 to obtain the information needed for your 1099 forms. The information needed is the legal name, address, and taxpayer identification number. The W-9 form is helpful because it specifies the entity classification of the taxpayer and you don't need to prepare a 1099 for a corporation. It is best practice to obtain the Form W-9 from your vendors before issuing the first check to them. This will allow you time to properly enter the payee in your system from the beginning. We also strongly advise taking the time to review the printed forms for errors prior to submitting.
A frequently overlooked rule associated with 1099 forms is the requirement to e-file if filing 250 or more of these information returns. According to the IRS, some of the largest notices of tax penalties the ADKF Department of Tax Controversy has handled this past year have been for penalties associated with the misfiling of 1099 forms where the taxpayer has erroneously submitted 1099 forms disregarding the rules.
The penalty rates and maximums for not filing correct information returns may apply if you:
- Don't file a correct information return by the due date and a reasonable cause is not shown.
- File on paper when you were required to file electronically.
- Don't report a Taxpayer Identification Number (TIN).
- Report an incorrect TIN; or
- Don't file paper forms that are machine readable.
Penalties for not providing correct payee statements may apply if:
- You don't provide a correct payee statement by the applicable date and a reasonable cause isn't shown.
- All required information isn't shown on the statement; or
- Incorrect information is included on the statement.
Common mistakes we saw this year (at a penalty of $270 for each 1099!) included:
- A filler Social Security # used - 123456789
- A filler Address used- 100 Main Street
- 1099 forms submitted by mail when they should have e-filed because they were over the filing threshold of 250 returns which requires e-filing.
The first two of these common mistakes could have been avoided had the filer taken the time to obtain a W-9 form from the payee, input the correct Social Security number and address prior to printing the check, or correcting it prior to printing the form 1099.
We also saw where 1099 forms were submitted even when the vendor payment was less than the filing threshold of $600 and when the vendor was a corporation. This increased the number of forms submitted thus pushing the taxpayer over the e-filing requirement and increasing the total penalties charged at a rate of $270 per form.
At a rate of $270 per form, this can easily add up to $50,000-$100,000, a devastating amount for a small business. The penalties add up fast; especially if your accounting software is not set up to properly generate 1099s and one is generated for every vendor, regardless if a 1099 is required.
PENALTIES, as listed on the IRS website:
Small Businesses with Gross Receipts of $5 Million or Less
(*Average annual gross receipts for the most recent 3 taxable years)
IRC 6721 & IRC 6722
Time returns filed/furnished
Due 01-01-2020 thru 12-31-2020
Not more than 30 days late
$50 per return or statement - $194,500* maximum
31 days late – August 1
$110 *per return or statement - $556,500* maximum
After August 1 or Not at All
$270* per return or statement - $1,113,000* maximum
Intentional Disregard
$550* per return or statement - No limitation
Note: It is easy to avoid penalties associated with 1099's, but they are not easily abated.
In our September 2020 Newsletter, we published an article by one of our highly skilled bookkeepers, Kata Strong, who provided details of how-to properly prepare 1099 forms in QuickBooks: Preparing 1099-MISC Forms in QuickBooks. Please read it to equip yourself with the steps to file your 1099's correctly.
Alternatively, you can let the professionals take care of the preparation. Please call our ADKF Bookkeeping Department for assistance with any of your bookkeeping needs, including 1099 preparation.
If you receive an IRS notice for penalties associated with 1099's or other tax forms call our Department of Tax Controversy so we can help with penalty reduction or abatement. We are happy to help!