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Simple tips that help you save money and hours spent on gathering information for 1099 reporting.
As the tax season is just around the corner, business taxpayers are gearing up for a hopeful New Year in 2021. Starting with the tax season in January 2021, business taxpayers, to say the least, are curious yet anxious about the new changes to Form 1099-MISC and the re-introduction of Form 1099-NEC.
While 1099 reporting is not exactly a smooth drive, there are ways that can help small business owners to reduce the time and effort it takes to get the tax forms right.
The most important thing to remember here is that the due date for all 1099 forms has been accelerated, which leaves taxpayers with just 30 days to gather the information, order the forms, validate the information, and file it electronically or by mail.
Since there are no special due dates dedicated to either of the filing methods, both types of files must be submitted to the IRS on or by the 1st of February 2021.
With that piece of information, let’s look at 5 common mistakes that small business owners usually make when reporting 1099 forms and 5 fool-proof measures to save time and report accurately.
Let’s look at 5 common mistakes that small business owners should avoid when reporting 1099 forms.
According to the IRS, starting with the tax year 2020-2021, all business taxpayers must report nonemployee compensations in Form 1099-NEC (Non-Employee Compensations), and NOT in Form 1099-MISC.
If you pay $600 or more to independent contractors or freelancers for their services, then you must report such nonemployee compensations in Form 1099-NEC starting this tax season in 2021. Order the latest 1099-NEC forms from the IRS here.
This is one of the most overlooked fields in the 1099-MISC form. If you have withheld any payments or taxes from the IRS, then you must report the withheld amount in the Backup Withholdings field.
In a rush to just get the tax filing process out of the way and to avoid paying more taxes, some businesses choose to misclassify their employees as independent contractors.
Even though this option may seem tempting, it is a corrupt practice and your business can be heavily penalized if found that you were misclassifying your employees intentionally.
So, avoid misclassifying your employees. Rightfully send Form W-2 (for employee) and Form 1099-MISC (for independent contractor/vendor/freelancer).
This is another step that small business owners tend to miss when preparing their tax forms. It is absolutely essential to verify the TIN/SSN/EIN of the individual with whom you have transacted for business purposes.
If you proceed to file your forms without verifying the TIN/SSN/EIN, and if the said identification numbers turn out to be invalid, the IRS will reject your tax files and may even impose some penalty for inaccurate filings.
So, be sure to verify the TIN/EIN/SSN according to the IRS database before you enter the information in your 1099 forms. Use Tax1099’s TIN Matching tool to match your employee or vendor TINs per the IRS records.
You have to remember that 1099 is not just one form. 1099 includes a series of forms that are primarily used for informational filings.
There are a total of 17 forms in this series, which includes the new 1099-NEC form.
Each of the forms has a different purpose as follows.
So, be careful when reporting with your 1099 forms. No one 1099 form covers everything that each business has to report.
Fortunately, you do not have to file all the 1099 forms. Check which 1099 forms to file here.
If you bought a smooth nylon suit to wear to your business meeting, that is not exactly a business expense. It’s a personal expense.
Differentiate personal expenses and business expenses with this simple fine line.
Business Expense: If it is absolutely reasonable, necessary, and required for your business to operate, then such an expense can be considered as a business expense.
Personal Expense: If you purchase something or spend money on something that has nothing to do with your business or in no way influences your business operations, then such an expense can be considered as a personal expense.
However, the IRS provides a reasonable definition to differentiate personal versus business expenses.
The IRS states “Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.”Learn more about the difference here.
Before you starting reporting any payments you have made to vendors, make sure that you have their name/business name and TIN. Send W-9 forms at least a week in advance to get this information and conduct a quick TIN match to verify if the provided information matches the IRS records.
It is possible that many small business vendors do not have any clue about W-9 forms. It is your responsibility to send out these forms, collect the required data, and report it accurately.
It is a wise idea to invest in 1099 reporting software that is updated every year as per IRS regulations and deadlines. It will automate all of your reporting processes and will save you hundreds of hours and dollars.
We highly recommend Tax1099 as a reliable tax filing software that is used by thousands of small and medium businesses in the US. It is a perfect tool that integrates with QuickBooks, Xero, and many other accounting systems, and helps you report your 1099 forms accurately. Check out Tax1099 here.
This is a strict rule. Avoid filing late because the IRS imposes heavy penalties for every day the filing is late. Make sure that you file your 1099 forms electronically or by mail on or before the deadline. The deadline for the tax year 2020-2021 is February 1, 2021.
When in doubt, verify your information and double-check the forms before filing. It is better to take some time and file your forms accurately than to rush and pay penalties for inaccurate forms.
If you want to learn more about 1099 filing, check out the 1099 filing tips here.