An essential component of your year-end planning is information return filing. These forms come with a special set of rules. When not filled out properly, your business can be subject to large penalties or other potential financial and reporting issues.
Information returns forms are generally used to notify the government and taxpayers about taxable payments you or your business made. The most common types of information returns at year-end are W-2 forms and 1099 forms.
At its most basic, the difference between W-2 and 1099 forms is this:
Let’s take a look at what businesses should be aware of regarding this federal payroll reporting requirement, including how to correct a 1099 NEC or MISC form if you made an error.
What’s the difference between W2 and 1099?
Once you’ve determined that you’ve hired an independent contractor, or have a need to prepare a 1099 form, the correct filing of the Form 1099 is incredibly important. Here are 10 common mistakes we see clients make when filing form 1099.
1. Not filing a form when a form is needed.
The biggest mistake we see is that taxpayers make is neglecting to file an information return when one is required. There are several situations that require a Form 1099 or other information return to be filed. If you’re not sure whether or not you need to file a 1099 form, you can download our 1099 e-book to learn more.
2. Not filing by the due date.
In general, all information returns are due to the recipient by January 31, 2023. Forms W-2 and 1099-NEC are due to the IRS (Internal Revenue Service) by January 31, 2023, as well, regardless if you electronically or paper file. For the most part, the rest of the 1099 forms are due to the IRS by February 28, 2023, if paper filing or March 31, 2023, if electronically filing.
The best way to avoid issues with 1099 filing is to start preparing early. Review your vendor information before year-end to be sure you have all the Form W-9s and other information required to file these forms.
3. Completing the wrong form.
If paper filing, be sure to use the correct year of the form. Make sure to prepare the red Copy A to be filed with the IRS. Also, ensure you start with the correct Form 1099, ex. 1099-MISC or 1099-INT, etc.
4. Using the wrong box on the form.
When preparing your forms, even if you have the correct form, be sure to use the proper box on the form. On the Form 1099-MISC, there are several boxes the IRS taxes in different ways:
5. Not reporting a Taxpayer ID Number (TIN) or reporting an incorrect TIN.
Be sure you are receiving and regularly updating the Form W-9 for your vendors so you can be sure you have appropriate information to file information returns at year-end. You can also go to the IRS website and run the information through a TIN verification to see if what you received from your vendor matches the IRS records. Another key thing to watch out for here is using the appropriate name for the TIN received. In some cases, you will receive a Social Security number for a Schedule C business but will receive the entity's doing business as (dba) name instead of their personal name. When the IRS attempts to match the Social Security number with the dba name in the system, they will not match because they will be expecting a person’s name. This will likely trigger an IRS Notice and possibly a penalty.
6. Using incorrect information to complete the form.
Double check your records to be sure you are using the appropriate amounts for the correct year and the correct vendor. Make sure you are using the vendor’s correct name and address for the form. Several accounting systems will track 1099 information for you, but you must set it up correctly.
7. Filing a paper return when filing electronically is required.
The IRS requires a payer to e-file the information return forms when the number of forms for a single type of form for the year is more than 250. This is a per-form count, so if you have five 1099-INT forms and 300 1099-MISC forms, you are only required to e-file the 1099-MISC forms. You can register to e-file forms at https://fire.irs.gov/. There are regulations pending that may reduce this amount below 250, but at this point, they have not been issued.
8. Not sending in a Form 1096 transmittal when paper filing.
A Form 1096, a transmittal form, is required when paper filing. One Form 1096 is required per type of 1099 filed. This helps the IRS to know if they have received and read all forms attached. This form is not required when you electronically file.
9. Not preparing machine readable forms.
The IRS will machine read these forms. It is important to write legibly and in dark ink so the forms can be machine read correctly.
10. Improper formatting of name, address, etc.
Completing a name or address in the wrong format will cause the form to be misread, as it is read by machines. Be sure to fill out the form in the proper format so it can be processed correctly.
Learn more about the requirements of Form 1099.
It is highly unlikely that you will go through 1099 filing season and not come across one required correction, but correcting forms is easy once you understand the process. It is important to note that, unlike a Form W-2 correction form, Form W-2c, there is no separate 1099 correction form. It is the same form as the original 1099.
There are two types of 1099 errors to be corrected. Type 1 only requires one Form 1099 to be filed to correct the error. Type 2 requires two 1099 forms to be filed to make the correction.
Type 1 Errors
Type 1 errors occur when you prepare a form with:
To correct Type 1 errors, file the correct form with the correct amount, code, checkbox, name or address and check the “CORRECTED” box (generally located at the top of the form). Submit the corrected 1099 form to the recipient and prepare the red Copy A to send to the IRS with the Form 1096 transmittal if paper filing. For electronic filing, you do not need to send in a Form 1096, nor should you mail in the originally filed forms with the correction to the IRS.
Type 2 Errors
Type 2 errors occur when you prepare a form with:
You will need to file two form 1099s:
If the recipient of the form has different information in their records, they will likely contact you for an explanation or correction of the Form 1099. Occasionally, this difference in records is due to a check being written from your bank account and not yet deposited in the recipient account. It is important to investigate differences noted from the recipients. The information reports on those forms will need to match what is reported on their tax return and you don’t want to be the cause of incorrect information.
An IRS notice is the other main reason to amend a form. This generally relates to a TIN that doesn’t match what the IRS has for the recipient's name.
Just remember—when correcting forms, be sure to verify the type of error, so you know if you need to prepare one 1099 or two to complete the correction.
If a contractor has received more than $600 in payments in the course of the year and receives a 1099-G, they must report that income on their 1040 tax form. Some contractors may be exempt from paying taxes depending on their specific circumstances. If you qualify for an exemption, you must follow the instructions at IRS.gov to request one.
The short answer is no, even if you paid the vendor more than $600. In the case of electronic payments (credit card payments), the payment processor will handle any required reporting of payments.
FYI: Those payment processors are required, under certain circumstances, to send out a different version of the 1099, called a 1009-K.
If the vendor is engaged in a trade or business, they are probably required to file a 1099-MISC. If the vendor is not engaged in a trade or business, they are probably required to file a 1099-NEC.
Visit the IRS website for more details.
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