Businesses who employ contractors or self-employed service providers must file the revised Form 1099-MISC and the new Form 1099-NEC by February 1, 2021 and provide copies to those contractors.
The IRS is very concerned with the 1099 (and equivalent) compliance and 1099-related fraud. Because of these concerns, all business audits (small or large) will include 1099 (or equivalent) tax information request with the exception of limited scope audits. Non-compliance is subject to significant penalties and interest.
Penalties (General Rules)
- Intentional disregard and not providing a correct statement carries a penalty of $560 per 1099, with no maximum for the year.
- Many states, including California, generally follow suit, so the penalty amount could double.
- Late filing of mandatory 1099s could lead to penalties ranging from $50 to $280 per 1099, with a maximum of $1,130,500 a year for your small business.
- The amount of the penalty is based on when you file the correct information return, as follows:
- $50 per 1099, if you file within 30 days of due date; maximum penalty of $197,500
- $110 per 1099, if you file more than 30 days after the due date but by August 1; maximum penalty of $565,000
- $280 per 1099, if you file after August 1; maximum penalty of $1,130,500
- A small business that could receive maximum penalties is a business with $5 million or less in average annual revenues for the previous three tax years.
New Form 1099-NEC
Form 1099-NEC is a new form 2020. It generally replaces form 1099-MISC Box 7 non-employee compensation. Certain transactions that previously were not subject to reporting are now subject to 1099-NEC reporting. In some cases, taxpayers will need to report one transaction on both 1099-NEC and 1099-MISC (legal fees, etc.).
Please be aware that not all 1099 providers will provide tax advice or assist with resolving 1099 issues before filing. There are other issues that could impact the 1099 filing (NEC and MISC) with respect to (i) state filings; and (ii) reporting state taxes withheld.
Learn more about the 1099-NEC form on the BPM website.
Please note all tax returns are signed under the penalties of perjury. All business returns contain questions regarding 1099 and equivalent (form 1042) compliance where the taxpayers are required to affirmatively answer on whether or not they complied with 1099 (or equivalent) standards. Not providing form 1099 can also impact a business deduction, where failure to provide form 1099 could result in a loss of a deduction (federal or state).
Shareholders and Debtholders Transactions
Additional reporting requirements should be considered with respect any businesses that made shareholder (or other) distributions before December 31, 2020 and any transactions with foreign shareholders and debtholders.
As you prepare for the 2020 tax season, connect with your BPM tax advisor to determine how to report any independent contractors within your organization.