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.
5 Common Mistakes To Avoid
Let’s look at 5 common mistakes that small business owners should avoid when reporting 1099 forms.
#1 – Reporting nonemployee compensations in Form 1099-MISC
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.
#2 – Not reporting backup withholdings
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.
#3 – Misclassifying your employees as nonemployee workers/ independent contractors
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).
#4 – Omitting TIN Match
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.
#5 – Not using separate 1099 Forms
You have to remember that 1099 is not just one form. 1099 includes a series of forms that are primarily used for informational filings.
Different Types of 1099 Forms
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.
- 1099-A is used to report Acquisition or Abandonment of Secured Property
- 1099-B is used to report the Proceeds from Broker, and Barter Exchange Transactions
- 1099-C is used to report Cancellation of Debt
- 1099-CAP is used to report Changes in Corporate Control and Capital Structure
- 1099-DIV is used to report Dividends and Distributions
- 1099-G is used to report Certain Government Payments
- 1099-H is used to report Health Coverage Tax Credit (HCTC) Advance Payments
- 1099-INT is used to report Interest Income
- 1099-K is used to report Merchant Card and Third Party Network Payments
- 1099-LTC is used to report Long-Term Care and Accelerated Death Benefits
- 1099-MISC is used to report Miscellaneous Income
- 1099-OID is used to report Original Issue Discount
- 1099-PATR is used to report Taxable Distributions Received from Cooperatives
- 1099-Q is used to report Payments from Qualified Education Programs (Under Sections 529 and 530)
- 1099-R is used to report Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, and more.
- 1099-SA is used to report Distributions from an HSA, Archer MSA, or Medicare Advantage MSA
- 1099-NEC is used to report Nonemployee Compensations
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.
5 Useful Tips To Report Accurately
#1 – Avoid reporting personal expenses
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.
#2 – Send W-9 Forms to vendors
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 owners may lose touch with their vendors once a certain transaction is closed in full. Hence, it is encouraged to withhold a part of the payment until your vendor provides the required information, and process it after the information has been validated.
This way, your vendors will provide the required information within the stipulated timeframe, helping you avoid delays and unnecessary back and forth.
#3 – Send W-2 Forms to employees
Send all your employees Form W-2 to help them declare their name/SSN or name/TIN combinations. Use this information in your 1099 forms as necessary.
Be sure to validate the SSN/name combination against the IRS records here.
#4 – Use Form 1099-NEC
When reporting nonemployee compensations (payments amounting to $600 or more), be sure to use the new 1099-NEC form. Send copy ‘of to the IRS, Copy ‘1’ to the state tax department, and Copy ‘B’ to the recipient/vendor.
#5 – Check state-wise 1099 reporting guidelines
1099 forms are usually a part of the Combined Federal/State Filing Program (CF/SF). However, the newly introduced 1099-NEC form is not a part of this program (yet). So, be sure to check the requirements for Form 1099-NEC according to your state.
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