Many dread the tax filing season. It can be tedious, confusing, and may lead to penalties if done incorrectly. It’s even more challenging for business owners who hire a variety of employees: from regular full-time employees to independent contractors and gig workers.
One particularly challenging part of filing taxes is the 1099 Form, which is a collective term for separate tax forms covering other income aside from those paid to common-law employees. Business owners issue the relevant type of 1099 and the taxpayer fills them out, declaring their taxable income–for each application form. Consider the following tips to help prevent common tax filing mistakes:
1. Familiarize yourself with the 1099 forms
The 1099 form is the main cause of tax filing mistakes, and it’s not really surprising. As a business owner, you’ll probably deal with only one or two of these forms–and it largely depends on what industry you operate in. It will determine the type of income you have as well as your expenses and the 1099 tax write offs you can apply for.
View the IRS website or make formal inquiries to get further help with the 1099 forms. Here are some of the different kinds of the 1099 form:
- 1099-A, Acquisition or Abandonment of Secured Property. This is used to report foreclosure on a property. If your property is foreclosed and your mortgage canceled, then that canceled debt is considered an income that has to be reported.
- 1099-B, Proceeds From Broker and Barter Exchange Transactions. This form is for reporting income from the sale of stocks, contracts for regulated futures and foreign currencies, and options. Also, if you traded property or service through a barter agreement, this form applies.
- 1099-C, Cancellation of Debt. Apart from those in 1099-A, any forgiven or canceled debt valued at $600 or more, has to be reported through this form.
- 1099-CAP, Changes in Corporate Control and Capital Structure. If you’re a shareholder who acquired control of a corporation, this one’s for you. Form 1099-CAP is used for reporting cash, stock, or property acquired from substantial changes in a corporation’s capital structure.
- 1099-DIV, Dividends and Distributions. Separate from the 1099-CAP, this form is only for reporting income from dividends paid by companies or other entities.
- 1099-G, Certain Government Payments. Most commonly used to report unemployment compensation and other tax refunds from the government.
- 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments. For people who received advance payments from qualified health insurance payments for recipients and their qualified family members, this is the form to use.
- 1099-INT, Interest Income. As the name implies, this is for reporting interest income and includes a breakdown of interest income and other expenses as paid to investors.
- 1099-K, Merchant Card, and Third Party Network Payments. This is mostly used to report payment transactions from debit, credit, and stored-value cards. It is also used for the settlement of third-party payments that exceed $20,000 in value and are more than 200 transactions in total.
- 1099-MISC, Miscellaneous Income. Used for reporting at least $10 of tax-exempt interest or dividends and at least $600 for rent, prizes and awards, honorariums, payments to an attorney, fishing boat and crop insurance proceeds, and other forms of miscellaneous income.
- 1099-NEC, Non-employee Compensation. A fairly recent addition to the 1099 family, 1099-NEC was created specifically for reporting self-employment income–a taxable income formerly reported under 1099-MISC. If you received $600 or more from your self-employment jobs, such as freelancing or consultancy services, expect to receive this form.
Additionally, there are other types of 1099 forms, such as:
- 1099-OID or the Original Issue Discount.
- 1099-R for Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- 1099-LTC or Long-Term Care and Accelerated Death Benefits.
- 1099-PATR for Taxable Distributions Received From Cooperatives.
- 1099-SA, which pertains to Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
- 1099-Q or Payments From Qualified Education Programs
In the event that you issue a wrong form and it has been filed to the IRS, you need to issue a corrected 1099 form of the correct kind. Corrections are used for using the wrong type of return form, incorrect codes or money value, marking the wrong checkbox, filing a return when you shouldn’t have, or errors with the taxpayer identification number.
It is also important to note that, unlike the correction form for W-2 (Form W-2c), which is for regular income filing for employees, the correction for 1099 forms can be found in the very same form as the original ones. So as an employer, you can issue the correct Form 1099 to your employees covered by this one.
2. Verify your employee classifications
Of course, it’s understandable that there are significant differences between being a common-law employee, whether it’s part-time or full-time, and being an independent contractor. Businesses often turn to independent contractors and freelancers for project-based or more specialized work that won’t require them to be a permanent part of the company. Remember that this practice can lead to hefty penalties. For example, Senate Bill 459 imposes “significant penalties” against employers who willfully misclassify employees.
A simple rule of thumb, in this case, is that when employees engage in an employee-employer relationship, or when you have control about what they do and how they do it, then they’re probably an employee. Meanwhile, if you can decide what a worker does but have no control over how they do it, then they’re probably independent contractors. A more detailed guide to separating different types of workers from an employer standpoint is available from the IRS website.
This will then guide you with the type of tax form you will be issuing them during the tax season. Generally, common-law employees are issued the Form W-2 or the Wage and Tax Statement. Freelancers and independent contractors receive Form 1099-NEC, for Non-employee Compensation. This officially separates freelancing payment from the previous Form 1099-MISC or Miscellaneous income. If you’re unsure about the classification of your worker and would like to avoid penalties, you can always opt for a Form SS-8, or the Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Either you or the worker concerned can file this form and the IRS will sort the problem for you.
3. Check your calculations
The IRS reported about 9 million math error notices in 2021, mostly due to stimulus payments. However, even before the pandemic, the revenue service reported 2.5 million errors in 2017. These mistakes usually range from simple mathematical operations to selecting the wrong value from tax schedules. Usually, the IRS will send you an error notice that will inform you where the mistake occurred as well as your new tax refund or deficit, depending on the new computations. This error notice can cause a delay in your business’ return.
While you can recheck your computations and filings before you submit them, the best option to avoid math errors in your 1099 form is to use tax software. Usually, you’ll only need to input the necessary details, such as your income records, and answer a few questions and the software will fill up the proper form for you.
4. Submit by the deadline
Most of the 1099 form types have the same deadline, which is usually by the end of March for the following year. The 1099-NEC form, which reports non-employee compensation, is usually due at the same time as the W-2 form or the Wage and Tax Statement. To avoid getting swamped with the last-minute preparations, make it a habit to keep all your invoices and receipts concerning all payments made to you as well as your expenses–making a good bookkeeping practice for you and your business.
Failing to file your tax returns on time, including the tax extension, will lead to a late-filing penalty of 5% of the tax you owe for every month your payment is delayed. It is capped at 25% or five months. To avoid this penalty from failure to file, consider filing and submitting your return by the due date even if the balance is not ready yet. There are separate tax penalties for failure to pay, failing to pay the right estimated tax, and even issuing checks without sufficient bank balances.
For businesses, the IRS will usually send a notice instructing you to respond. Remember that ignoring these tax notices could lead to more penalties and fines or worse, an audit from the IRS itself. Unlike individual tax-payers, failure to file for businesses ranges between 10 to 15% in penalties up to a maximum of 25%. Meanwhile, erroneous filing can lead to an accuracy-related penalty of 20% of the actual amount you owe the agency.
Another dreadful effect of not filing your taxes on time, including Form 1099-NEC for independent contractors, is the suspension of your benefits. It can even lead to property seizures for cases of severe tax failures.
5. Keep your tax returns
Although it sounds tedious and space-consuming in your office, it’s generally considered to keep a copy of your tax return for at least three years–something recommended for both businesses and individual taxpayers. This is the period of time that the IRS can legally conduct an audit based on instances of gross underreporting of income. On the other hand, you can keep your returns for two years after you paid the tax, or whichever of the two is later, if you’re looking to file claims for tax credits or refunds. The IRS also recommends keeping your tax records for 7 years if you’re planning to claim losses from bad debt reduction or worthless securities.
Taxation is an inevitable part of commerce and trade, yet it doesn’t have to be done haphazardly. By being diligent and present-minded as you go about it, plus developing long-term habits that make you understand the importance of proper filing of taxes, you can mold your company into a compliant and accurate taxpayer and issuer of tax forms for its employees. More than avoiding the penalties and potential audits down your way, it’s the convenience and peace of mind you get to enjoy knowing that you fulfilled your duty as a business owner and you will continue enjoying the benefits that your people will also enjoy.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.