As any small business owner will tell you, there’s never a shortage of expenses to worry about. Don’t add IRS late penalties to the list. When you file a 1099 late, you incur a penalty from the IRS, and while it may be a small fee per form, it adds up when there’s a late fee incurred for each worker. In this article, we’ll cover when to file 1099s, as well as how to do it and what penalties you may face for late filing.
The IRS requires your business to file a 1099 for each individual vendor or contractor you have paid $600 or more during the tax year. There are 16 different versions of a 1099, and each covers a variety of different factors and circumstances, so it’s important to know which one applies to your contractors. If you have regular employees, you instead need to file a W2.
The 1099 informs the IRS of how much you have paid your contractors. The independent contractors are then required to calculate their own taxes, as most businesses do not withhold a contractor’s taxes for them. This is the key difference between W2s and 1099s. A W2 form requires employers to report to the IRS how much they paid their employees as well as the taxes withheld.
Both Copy A and Copy B of Form 1099 must be submitted to the IRS and the independent contractor respectively by January 31 of the following year, regardless of whether you are filing through the mail or efiling. For the 2020 tax year, Section 6071(c) requires you to file Form 1099-NEC on or before February 1, 2021, using either paper or electronic filing procedures. File Form 1099-MISC by March 1, 2021, if you file on paper, or March 31, 2021, if you file electronically, according to the IRS.
Of course, it is always good practice to begin the tax process as early as possible so that you’re not struggling to get everything done at the last minute.
The penalties for late filing are listed on the IRS website by year. The penalty you receive depends on how late the IRS receives the 1099 and if they believe there was intentional disregard. Penalties are issued for each return or statement, so the more contractors you work with, the worse the penalty will be. The penalties for filing incorrect information are different than the penalty for filing a late statement.
For small businesses with gross receipts totalling $5 million or less, the late penalties on 1099s are as follows for forms due in 2020. Keep in mind that penalties may increase for any given year subject to inflationary adjustments.
Not more than 30 days late
31 days late – August 1
After August 1 or Not at All
$50 per return or statement - $194,500 maximum
$110 per return or statement - $556,500 maximum
$270 per return or statement - $1,113,000 maximum
$550 per return or statement - No limitation
You are required to submit a 1099 for each contractor you have paid $600 or more over the course of the tax year. You need to do this every year in which they complete work for you if that work cost $600 or more. If you hire contractors but have paid them less than $600 over the course of the tax year, you are not required to file a 1099.
There are a couple of different ways to file 1099s with the IRS; you can file with paper or file electronically, which is known as efiling.
Paper filing is a tried and true method where 1099s are printed, filled out on the computer or by hand, sealed, and mailed to the IRS using IRS-approved paper and envelopes. While this is the way it’s been done for years, it can take weeks before the 1099s reach the IRS. This means if there are any mistakes with the 1099s, it will take a while to find out and much more time to correct the mistakes. Plus, IRS employees will need to manually transcribe each 1099 into the IRS system.
Efiling is more efficient. Rather than filling out the forms with the proper paper, printing them, and mailing them, everything is done online. Once the forms are completed, they are sent directly to the IRS, so any mistakes are found immediately. If there are no such mistakes, the 1099s can be inputted into the system directly without having to be transcribed by IRS staff, which leaves far less room for human error.
The added efficiency and reliability of efiling is enforced within The Taxpayer First Act of 2019. The Taxpayer First Act mandates that more businesses begin to file their taxes electronically. The act aims to simplify and modernize the way Americans and American businesses do taxes. In 2020, taxpayers filing 250 or more tax returns will be required to efile. In 2021, that number is reduced to 100, followed by a further reduction to 10 in 2022.
Due to The Taxpayer First Act, it’s possible that your business is already required to file electronically, and if not, it will be very soon.
To file Form 1099, you will need:
You will fill this information out on Copy A and Copy B of Form 1099. Send Copy A to the IRS, and Copy B to the contractor.
When mailing these kinds of important documents, it’s important to send them using proper security envelopes so that the recipient’s privacy is maintained. Security envelopes are envelopes with transparent plastic windows that reveal the name and address of the recipient but protect the rest of the contents from being exposed.
1099 envelopes are designed for Form 1099s. There are also envelopes specifically designed to transport W2s. Some W2 envelopes will work for Form 1099s, and some will not. The size, dimensions, and placement of the security window(s) are determined by the kind of software you are using as well as the varying sizes of the different tax forms. It’s also the case that some of the various types of 1099s need an envelope specifically designed to hold them.
✉️ For more details, read our article: All About Tax Form Mailing: 1099 and W2 Envelopes.
Efiling Form 1099 requires the same information as filing with paper, but it’s a much smoother and efficient process. For one thing, you don’t need to find and purchase specifically designed envelopes.
Before you begin the efiling process, ensure you have all of the relevant information on hand. A convenient feature of efiling is if you efiled the previous year, you can check with your efile provider to see if the information is still stored in the software. This will save you from repeating the tedious job of re-entering the same data year after year.
Use a W9 to collect relevant information from your independent contractors.
To efile a Form 1099, you will need:
💡 Can You Handwrite a 1099 Form? And Other Tax Form Questions Answered, including best practices for handwriting W2s and 1099s.
💡 We know firsthand how confusing tax forms can be, so we’ve put together this quick primer to simplify your tax season. Your Guide to Different Forms of Income Tax Return.
We’re big on efiling and helping businesses and individuals find the best tax filing options.Follow our blog for the latest trends, strategies, product comparisons, and more.
This article is designed to provide accurate and authoritative information. However, it is not a substitute for legal advice and does not provide legal opinions on any specific facts or services. The information is provided with the understanding that any person or entity involved in creating, producing or distributing this article is not liable for any damages arising out of the use or inability to use this product. You are urged to consult an attorney concerning your particular situation and any specific questions or concerns you may have.
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