A Look Into 1099 Reporting

The IRS develops strict policies around the reporting of income making the tax law surrounding 1099s vital to comprehend. The most common 1099 forms are the 1099-K, 1099-NEC and 1099-MISC. This article will go into detail about each one to ensure the proper reporting and filing requirements are met. 

The 1099-K

Form 1099-K is used to report the gross amount of payment transactions. A 1099-K is usually issued from third-party payment settlement companies, like PayPal. The IRS defines a payment transaction as one where a payment card, such as a credit card, or account number is accepted as payment. A 1099-K will only be issued if there are over 200 transactions for the year and the transaction amounts exceed $20,000. No credit adjustments, discount amounts or refunds are included in the gross dollar amount. Once this information is received, it should be reported as income on the tax return. It is not unusual for larger companies to receive multiple 1099-Ks. The income should be already on the books when the sale is made, so the 1099-K serves as a double check. The gross amount of sales on the 1099-K may not match the sales on the books due to cash sales and sales processed by other third-party settlement companies. The 1099-K should still be kept as part of the tax workpapers for reference in future years. 

There are a few common mistakes that occur when 1099-Ks are issued. The first common mistake is having the wrong name on the form. If you notice that your personal name is on the form instead of the business name, you should request an updated 1099-K with the correct information. It is not a major issue if the income is being picked up on the personal return, but having the most accurate information is the best route. Furthermore, if the business is bought or sold during the year, a new W-9 form should be filled out by the new owners to ensure that correct information is on file at year-end. Similarly, if the business changes structure, like converting from a sole-proprietorship to a partnership, the changes should be given to the third-party payment processor in a timely matter. Usually, these changes occur beginning with a new tax year, so notify the third-party processor before the year-end 1099s are issued. Another issue to watch out for is when customers get cash back on purchases using a card. These cash back purchases will be included in the gross amount reported on the 1099-K. The cash back amount should not be included in gross income on the tax return, so it is important to have accurate reporting on these amounts to avoid being over-taxed. 

The 1099-NEC

For 1099s issued in 2020, the IRS created a new form called the 1099-NEC. This form is for the reporting of non-employee compensation. Previously, these amounts were reported on the 1099-MISC. Non-employee compensation needs to be reported on the 1099-NEC when at least $600 in services have been performed by someone who is not your employee, there are cash payments for fish purchased from someone in the fishing business or payments were made to an attorney. Furthermore, a 1099-NEC must be issued for each person from whom federal income tax is withheld under backup withholding rules. The only item reported on the 1099-NEC is non-employee compensation unlike the 1099-MISC that can report multiple items. Generally, independent contractors most commonly receive a 1099-NEC. There are a few common groups that are exempt from receiving a 1090-NEC including payments to a C or S Corporation and payments to a tax-exempt organization and tax-exempt trusts such as HSAs. The IRS has a published a full list of exempt groups on their website, but these are a few of the most common ones seen in the ordinary course of business. 

The 1099-MISC

The creation of Form 1099-NEC did not eliminate the 1099-MISC. The 1099-MISC is used to report a multitude of different items. When a business pays out at least $10 in royalties or broker payments, a 1099-MISC needs to be issued. Additionally, over $600 in rents, prizes, other income, cash paid from a notional principal contract, fishing boat proceeds, medical and health care payments, crop insurance proceeds, payments to an attorney, Section 409A deferrals, and nonqualified deferred compensation all will be reported on the 1099-MISC. Just like with the 1099-NEC, a 1099-MISC needs to be issued for each person from which federal income tax is withheld even if the amount is under $600. The S and C Corporation rules and payments to a tax-exempt organization, like an HSA account, are excluded from receiving a 1099-MISC. Attorney’s fees can either be reported on the 1099-NEC or the 1099-MISC.

Information Needed to File These Returns

Just like any tax form, specific information is needed to accurately file these returns. From the business issuing the 1099, the company information is required. Information such as legal name, address and EIN are necessary. The company should also have an accurate amount on the 1099. Records throughout the year should support this amount in case any questions or issues arise. The contractor or individual receiving the 1099 also needs to provide accurate information. Information such as legal name, address and SSN or EIN are required. The business should be provided a copy of Form W-9 before the individual receiving the 1099 begins work. This form includes all of the information that will be needed to file the 1099. 

Filing the 1099s

1099s need to be filed at the beginning of the year to avoid penalties. The due date for filing 1099s is January 31 each year. The IRS only allows a short timeframe since the 1099s need to be delivered to recipients in order to file their individual or business tax returns. The 1099s need to be postmarked and mailed by January 31 to avoid penalty. If the deadline is not attainable, a 30-day extension can be granted by filing Form 8809. The most common way to remit the 1099s is to electronically file them with the IRS. Electronic filing is required once 250 or more 1099s need to be filed. To be eligible to file electronically, Form 4419 must be submitted to the IRS by November 1 of the prior year. This form usually takes 45 days for the IRS to process. If Form 4419 is unable to be submitted by November 1, Form 8508 can be filed within 45 days of the 1099 due date. Form 8508 allows a special waiver to file the forms electronically. The penalty for not abiding by these rules can be costly, especially for small businesses. If electronic filing is required and there is no approved waiver on file, the business can be subject to a penalty of up to $280 per return type. If the business can prove a reasonable cause for the delay, the penalty may be waived. The other option is to file up to 249 returns on paper with no penalty. Most small business will be well below the 250 maximum for electronic filing, so paper filing may be in their best interest. 

Correcting Mistakes

If mistakes are found after the 1099s have been filed, a correct return can be issued. The business will need to correct the mistakes and file Copy A of the 1099 and Form 1096 with the IRS. A box saying it is a corrected form will be checked. If there are over 250 1099s and all of them need to be corrected, electronically filing the corrections is required. If there are less than 250 corrections, the business may choose whether to electronically file or paper file the new forms. Regardless, the IRS needs to be informed about any corrections. The recipients should also receive an updated 1099 for income tax reporting purposes. 

Tax Implications

The IRS is very strict on the reporting requirements for 1099s because they want individuals to pick the income up on their personal tax return and pay taxes. For single-member LLCs or sole-proprietors, this income will usually go to Schedule C along with the other business expenses. For other individuals who are receiving miscellaneous payments, the income will go to other income. Both categories are taxed the same. The IRS can easily verify accurate amounts of income are being reported on the tax returns since the 1099s are submitted to the IRS by the issuing company. The IRS has tools that electronically verify the accuracy. Keep that in mind when it comes to reporting the income on the tax return. Accurate reporting is the best route to avoid an IRS audit and penalties. 

Summary

There is a great deal of reporting information surrounding 1099s. The IRS closely monitors the filing and reporting of 1099s to ensure taxes are paid on the income. With technological advances, double-checking the 1099s against the tax returns is easier than ever. It is best to report correct information right away because receiving a letter from the IRS is never enjoyable. Once again, the IRS has great information and pdfs on the different 1099 forms. 

Sources: https://www.irs.gov/