Many dread the tax filing season. It can be tedious, confusing, and may lead to penalties if done incorrectly. It’s even more challenging for business owners who hire a variety of employees: from regular full-time employees to independent contractors and gig workers.
One particularly challenging part of filing taxes is the 1099 Form, which is a collective term for separate tax forms covering other income aside from those paid to common-law employees. Business owners issue the relevant type of 1099 and the taxpayer fills them out, declaring their taxable income–for each application form. Consider the following tips to help prevent common tax filing mistakes:
The 1099 form is the main cause of tax filing mistakes, and it’s not really surprising. As a business owner, you’ll probably deal with only one or two of these forms–and it largely depends on what industry you operate in. It will determine the type of income you have as well as your expenses and the 1099 tax write offs you can apply for.
View the IRS website or make formal inquiries to get further help with the 1099 forms. Here are some of the different kinds of the 1099 form:
Additionally, there are other types of 1099 forms, such as:
In the event that you issue a wrong form and it has been filed to the IRS, you need to issue a corrected 1099 form of the correct kind. Corrections are used for using the wrong type of return form, incorrect codes or money value, marking the wrong checkbox, filing a return when you shouldn’t have, or errors with the taxpayer identification number.
It is also important to note that, unlike the correction form for W-2 (Form W-2c), which is for regular income filing for employees, the correction for 1099 forms can be found in the very same form as the original ones. So as an employer, you can issue the correct Form 1099 to your employees covered by this one.
Of course, it’s understandable that there are significant differences between being a common-law employee, whether it’s part-time or full-time, and being an independent contractor. Businesses often turn to independent contractors and freelancers for project-based or more specialized work that won’t require them to be a permanent part of the company. Remember that this practice can lead to hefty penalties. For example, Senate Bill 459 imposes “significant penalties” against employers who willfully misclassify employees.
A simple rule of thumb, in this case, is that when employees engage in an employee-employer relationship, or when you have control about what they do and how they do it, then they’re probably an employee. Meanwhile, if you can decide what a worker does but have no control over how they do it, then they’re probably independent contractors. A more detailed guide to separating different types of workers from an employer standpoint is available from the IRS website.
This will then guide you with the type of tax form you will be issuing them during the tax season. Generally, common-law employees are issued the Form W-2 or the Wage and Tax Statement. Freelancers and independent contractors receive Form 1099-NEC, for Non-employee Compensation. This officially separates freelancing payment from the previous Form 1099-MISC or Miscellaneous income. If you’re unsure about the classification of your worker and would like to avoid penalties, you can always opt for a Form SS-8, or the Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Either you or the worker concerned can file this form and the IRS will sort the problem for you.
The IRS reported about 9 million math error notices in 2021, mostly due to stimulus payments. However, even before the pandemic, the revenue service reported 2.5 million errors in 2017. These mistakes usually range from simple mathematical operations to selecting the wrong value from tax schedules. Usually, the IRS will send you an error notice that will inform you where the mistake occurred as well as your new tax refund or deficit, depending on the new computations. This error notice can cause a delay in your business’ return.
While you can recheck your computations and filings before you submit them, the best option to avoid math errors in your 1099 form is to use tax software. Usually, you’ll only need to input the necessary details, such as your income records, and answer a few questions and the software will fill up the proper form for you.
Most of the 1099 form types have the same deadline, which is usually by the end of March for the following year. The 1099-NEC form, which reports non-employee compensation, is usually due at the same time as the W-2 form or the Wage and Tax Statement. To avoid getting swamped with the last-minute preparations, make it a habit to keep all your invoices and receipts concerning all payments made to you as well as your expenses–making a good bookkeeping practice for you and your business.
Failing to file your tax returns on time, including the tax extension, will lead to a late-filing penalty of 5% of the tax you owe for every month your payment is delayed. It is capped at 25% or five months. To avoid this penalty from failure to file, consider filing and submitting your return by the due date even if the balance is not ready yet. There are separate tax penalties for failure to pay, failing to pay the right estimated tax, and even issuing checks without sufficient bank balances.
For businesses, the IRS will usually send a notice instructing you to respond. Remember that ignoring these tax notices could lead to more penalties and fines or worse, an audit from the IRS itself. Unlike individual tax-payers, failure to file for businesses ranges between 10 to 15% in penalties up to a maximum of 25%. Meanwhile, erroneous filing can lead to an accuracy-related penalty of 20% of the actual amount you owe the agency.
Another dreadful effect of not filing your taxes on time, including Form 1099-NEC for independent contractors, is the suspension of your benefits. It can even lead to property seizures for cases of severe tax failures.
Although it sounds tedious and space-consuming in your office, it’s generally considered to keep a copy of your tax return for at least three years–something recommended for both businesses and individual taxpayers. This is the period of time that the IRS can legally conduct an audit based on instances of gross underreporting of income. On the other hand, you can keep your returns for two years after you paid the tax, or whichever of the two is later, if you’re looking to file claims for tax credits or refunds. The IRS also recommends keeping your tax records for 7 years if you’re planning to claim losses from bad debt reduction or worthless securities.
Taxation is an inevitable part of commerce and trade, yet it doesn’t have to be done haphazardly. By being diligent and present-minded as you go about it, plus developing long-term habits that make you understand the importance of proper filing of taxes, you can mold your company into a compliant and accurate taxpayer and issuer of tax forms for its employees. More than avoiding the penalties and potential audits down your way, it’s the convenience and peace of mind you get to enjoy knowing that you fulfilled your duty as a business owner and you will continue enjoying the benefits that your people will also enjoy.