ARE 1099 PENALTIES PART OF YOUR BUDGET?

If you are in business, you probably hate sending out 1099 Forms.  In fact, you are probably thinking - no one likes 1099s except the IRS.  That may possibly be true but so is the fact that if not reported timely and accurately it can completely blow your business budget.
 
The IRS matches nearly all 1099s and W-2s (those are the wage report forms from your employer) against your 1040.
 
The penalties for not doing so can vary from $30 to $100 per form ($1.5 million for the year), depending on how long past the deadline the company issues the form. If a business intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum. 
 
The 1099 penalty also applies if you file on paper when you were required to file electronically on your 1099 paper forms are not machine readable. Additionally, penalties may apply if you fail to report or include a correct TIN (tax identification number).  The amount of the 1099 deadline is based on when you file the correct information return.
 
Here are 6 things you should know about 1099s:

• You can give or receive - Generally, businesses must issue the forms to any payee (other than a corporation) who receives $600 or more (rents, services, prizes, attorney fees, etc.) during the year.  And that’s just the basic threshold rule; there are many, many exceptions.

 

• There are many varieties of 1099 - There’s a 1099-INT for interest; 1099-DIV for dividends; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions.  There are many categories, but the Form 1099-MISC (for miscellaneous) seems to prompt the most questions and is used by many small business owners worldwide.  

 

• Timing is everything - Normally, businesses must send out Form 1099 on or before Jan. 31 each year for the prior calendar year.  Before you start the 1099 process, make sure you have all the correct information on your contractors. Each 1099 should also include the amount of money paid to the contractor, which is entered in Box 7 under the title "Non-employee compensation."

 

• Beware of changed addresses - Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number.  That means you have an interest in making sure payers have your correct address.

 

• Report errors immediately  - The time delay means you have a chance to correct obvious errors.  So, don’t just put the delivery of 1099s in a pile; send them immediately.  If errors are identified, the employees should tell you, the payer, immediately.  There may be time for you to correct it before sending it to the IRS.  That’s clearly better for you.    

 

• Report every 1099 - The key to Forms 1099 is the IRS computerized matching.  Every Form 1099 includes the payer's employer identification number and the payee's Social Security (or taxpayer identification) number.  The IRS matches nearly every Form 1099 with the payee's tax return.  

 
There’s no perfect solution, but one thing is clear.  If you receive a Form 1099, you can’t just ignore it, because the IRS won’t.  Developing a procedure for your company can not only save your business time in ensuring accurate employee data is available but save you money from penalties and interest.

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