You’ve just received a heartstopping email. One of your vendors is asking why you didn’t send them their 1099. The deadline has long since passed, and now you’re half expecting the IRS to bang down your door threatening audits and penalties.
What do you do?
Around February of every year, we see a surge of emails and questions about late 1099s. Especially as your business grows, it can be difficult to keep track of who needs what form and by when. 1099s are especially complex, as there are over 20 different kinds all with different rules and requirements. In this case, we’re talking about 1099-NECs.
A 1099-NEC is a form for reporting income payments to non-employees
Think vendors, contractors, sole proprietors, that sort of thing. You might have previous experience sending these non-employees a 1099-MISC form, but in 2020 the IRS introduced the 1099-NEC to report all payments:
Made to someone who is not an employee
In exchange for services carried out in the course of your trade or business
Totaling over $600 per calendar year
You must file these forms with the IRS by January 31st. If you’re reading this blog it’s probably because that deadline has come and gone, but we have some tips to save you money and stress if that’s the case:
Check to make sure you really owe them a 1099
Just because a non-employee reaches out asking where their 1099 is doesn’t mean you owe them one. It may simply be a case of misunderstanding or confusion.
For example, if you paid this non-employee with a credit card, the payment settlement entity is responsible for issuing a 1099-K form. In this case, you do not need to issue a 1099-NEC.
Confusion can also arise surrounding the $600 threshold we mentioned above. 1099-NECs only cover fees for services performed. They do not include costs like reimbursements of materials or supplies. While a non-employee may have a total invoice of over $600, you’re only responsible for filing a 1099-NEC if their income for services performed surpasses that threshold.
Let’s say, after checking your records, you confirm you do owe this non-employee a 1099-NEC. What do you do?
Filing late is less expensive than not filing at all
This is not a situation where you can stick your head in the sand and pretend nothing’s wrong. As tempting as that might be, you risk paying significantly more in penalties for a failure to file than for a late filing.
1099s filed within 30 days past the January 31st due date can incur a $50 penalty per form. This penalty increases to $110 for forms filed between 30 days past due and August 1st. After August 1st, that penalty jumps again to $280.
Wherever you are in this timeline, any of these penalties are far better than the penalty you risk by not filing your 1099s at all. If the IRS becomes aware of this, they may convict you of Intentional Disregard, which is when “the filer knowingly or willfully fail[s] to comply with the filing requirements of the information returns.”
If you’re accused of Intentional Disregard, you could end up with a $560 penalty per form, double the highest penalty you risk by filing late.
We recommend that all our clients send in forms late rather than not at all. If you do get a penalty, it will be far less than the one you could incur by failing to file. And, in some cases, you may end up paying nothing at all.
You may not receive any penalty for a late filing
In our years of practice, we have rarely seen the $50 penalties applied to a 1099 filed within 30 days of the due date.
This is not us guaranteeing you won’t be charged a dime for a late 1099 form: the IRS is within its right to assess and fine your late filings as they describe on their website. But no matter how you cut it, file the late 1099, and either sleep well knowing that a $560 penalty was avoided or maybe get a pleasant surprise when no bill shows up at all.
If you’re sick of tax season being a time of panic, confusion, and fear for your creative business, the Revel Way can help you build the future you’re imagining. From maintaining compliance, tracking profitability, and developing a plan to scale to new heights, we provide the support you deserve so you can focus on what you do best. Learn more here.