The 1099 Survival Guide: Navigating Tax Season

Are you a business owner who dreads the thought of filing your taxes each year because it feels like understanding all the details and rules surrounding 1099 forms is impossible? Well, fear not–you are not alone! This seemingly complicated process doesn’t have to be so difficult. In fact, with a bit of knowledge about IRS regulations pertaining to 1099 forms, you can easily prepare for tax season and feel confident that completed documents are in compliance with existing laws. So let’s get started unpacking the mystery surrounding 1099 forms–let’s uncover exactly what you need to know before filing this crucial paperwork.

The 1099 Form is an essential document when it comes to filing taxes. It’s important to understand what a 1099 Form is, the types of forms available, and regulations pertaining to them in order to be prepared for tax season. Here we’ll provide an overview of the most relevant 1099 Forms for you and how you can easily prepare for the upcoming tax season.

Introduction To 1099 Forms

1099 forms are an important part of filing taxes for many businesses and self-employed individuals. 1099 forms are used to report all kinds of income that aren’t reported on a W-2 form, such as dividends, interest, royalties, rents, and payments from independent contractors. There are different types of 1099 forms depending on the type of income being reported, and we will primarily be focusing on Form 1099-MISC and Form 1099-NEC in this article. 

Prior to the year 2020, this information was presented on a 1099-MISC form. The Internal Revenue Service has reintroduced its version of the 1099-NEC form and is now used exclusively for these reports. Need even more specifics? You can find all answers regarding what you should report on your 1099-MISC form directly from their website!

Essentially, you must file a 1099-MISC if you have paid a person or a business:

Click here for a blank W9.

Just remember to save this in your file management system, like Box or Dropbox, so that you easily find it later. 

The IRS assesses stiff penalties for filing the 1099-MISC late or not filing at all.

• Failure to file correct information returns by the due date – There is a penalty of $50 per information return if you fail to file correct information returns by the due date. The penalty is capped at $565,000 per year ($197,500 for small businesses).

• Failure to furnish correct payee statements – There is a penalty of $50 per payee statement if you fail to provide correct copies to payees by the due date. The penalty is capped at $565,000 per year ($197,500 for small businesses).

• Intentional disregard of filing requirements – If failures are due to intentional disregard of requirements, the penalty is $570 per information return with no annual cap.

• Failure to file correct information returns due to intentional disregard – If failure is deemed intentional, the penalty is at least $570 per information return with no cap.

• Failure to furnish correct payee statements due to intentional disregard – At least $570 per statement to recipient if intentional disregard of requirements is found.

• Continuing failure to file/furnish required returns – There are additional monthly penalties if failures continue for more than 30 days after you are notified of penalties, up to a maximum of 12 months.

• Failure to furnish TIN – There is a $280 penalty for each failure to furnish a correct Taxpayer Identification Number (TIN).

In summary, late filing and furnishing of 1099s can lead to steep penalties per information return, with higher penalties for intentional failures. Filing complete and accurate 1099s on time is crucial to avoid these costly IRS penalties and enforcement actions

Exceptions to the penalty

The following are exceptions to the failure-to-file penalty.

• Reasonable Cause – The penalties may be waived if the IRS determines there was reasonable cause for the failure to file or furnish correct 1099s by the due date. However, the taxpayer bears the burden of proving reasonable cause.

• First Time Penalty Abatement – The IRS may waive the penalties for first-time late filing or furnishing if the filer has a clean compliance history for the prior 3 years. This is a one-time waiver.

• Statutory Exceptions – If the failure was due to certain events such as casualty, natural disaster, or other disturbance, the penalties may be waived.

• Other Waivers – The IRS also has the discretion to waive penalties based on the facts and circumstances of a taxpayer’s specific situation. However, this rarely happens.

Some other things that can help avoid late filing penalties:

• Using an IRS-approved third party transmitter if filing 250+ 1099s.

• Properly correcting errors via the Form 1099-MISC or 1099-NEC correction process.

• Having a compliant 1099 electronic filing system in place.

Reasonable cause, first-time abatement, and certain statutory exceptions can provide penalty relief in some cases. But the best approach is proper diligence, testing, and measures to ensure accurate 1099 filing by the deadlines.

Before you can file 1099s, it is important that your accounting is up to date and accurate, or you risk under or overreporting your vendor’s payments to the IRS. Using an accounting system like Xero will allow you to keep track of all of the inflows and outflows of cash without having to work in a messy spreadsheet or dates accounting software.

We only use Xero with our clients, because we know our time is better spent doing the work and guiding our clients, rather than struggling with software. We use Xero’s 1099 report to track which accounts within the chart of accounts are used to pay vendors, how much each vendor has been paid, and when it is time to gather 1099s from our clients’ vendors. It also has a handy feature that lets us exclude payments to C-Corporations or S-Corporations and payments made via Paypal and other excluded forms of payment. The rules we set up can be transferred year over year which makes it simple for us, and there is no limit to how many accounts or vendors we can track. 

There are many 1099 filing apps that connect with Xero, and we have synced up Xero and Track1099 to make end-of-year filing super easy for many years. When we are ready to file, we are able to pass contact and transactional data from Xero to Track1099 so that we do not have to manually update forms, which would mean more potential for mistakes.  Also, since TrackW9 and Track1099 are part of the same tool, W9 data can easily be passed along to Track1099 when it’s time to file forms. Yet another reason to implement technology, rather than doing it the old-fashioned way. 

Once all of your vendors are in Track1099 and it’s time to electronically file your 1099-MISC and 1099-NEC forms, it’s just a few clicks. You will review the forms, schedule e-File with the IRS and for any states requiring 1099s, and then the forms will be sent to your vendors via email (if you have provided an email address) or snail mail (if you didn’t have an email address available).

Here is more information about the Track1099 filing process. 

Track1099 Security

Are you worried that the 1099s you e-Deliver will fall into the wrong hands? Track1099 does not attach the PDF form to an email; instead, they send your recipients a secure link. Clicking on this link will take them to a secured site hosted by Track1099 where they must input the last 4 digits of their Tax ID in order to authenticate themselves. Should those numbers match what is found on their form, the vendor is then directed to an encrypted page that displays their document for download as a PDF file. 

Here is a video regarding Track1099 e-Delivery.

What States Require 1099s to be filed? 

Gone are the days when you only have to file 1099s with the IRS. Many states now want to be notified of any income their residents have received, in order to tie this back to their state income tax return. 

Some states participate in the “Combined Federal and State program” which means that when you file 1099s with the IRS, the IRS passes this information back to the state on your behalf. 

States currently participating in this program are: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Wisconsin

Track1099 can help to file 1099s in states where 1099s are required as the information is not passed back from the IRS. Some of these forms can be filed electronically using Track1099 and some still require that you mail or upload a form on their website. More information can be found on the Track1099 State 1099 FAQs here. 

What is on a 1099-NEC Form?

Below is an image of a 2022 IRS form 1099-NEC.

The “Financial Details” contains the EIN and W9 classification. 

It is important to complete the W9 classification so you only issue 1099s to those types of entities that require it.

1099-NEC Payment Boxes

How is the 1099-Misc Form Different from the 1099-NEC?

We typically just use Box 1 as most of the other boxes are relevant for our clients.