For the tax year 2022, the IRS will continue to use the relatively new Form 1099-NEC to enforce its filing requirements. Traditionally, businesses have used Form 1099-MISC – Box 7 to report nonemployee compensation. Now, you may need to use both 1099 forms and follow their unique specifications. If you are involved in a business, you must file IRS Form 1099-NEC to report any nonemployee compensation of $600 or more. Nonemployee compensation includes fees, commissions, prizes, awards, and any other forms of compensation for services performed by someone who is not classified as an employee.
Though 1099 reporting is not exactly a smooth drive, there are ways that can help small business owners to reduce the time, money, and effort it takes to get the tax forms right. The most imperative thing to remember here is that the due date for all 1099 forms has been faster, which leaves taxpayers with just 30 days to gather the information, order the forms, validate the information, and file it online or by mail. The due date for filing form 1099 NEC is 31-Jan-2023 and filers & tax professionals can use the Taxseer platform to eFile & automatically print/mail the hardcopy to the recipients.
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 methods to save time and report perfectly.
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
Starting with the tax year 2021-2022, all business taxpayers are supposed to report nonemployee compensations in Form 1099-NEC (Non-Employee Compensations), and NOT in Form 1099-MISC Box 7. 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.
#2 – 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.
#3 – 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 penalties 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.
#4 – 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 employees) and Form 1099-NEC online for your contractors.
#5 – Not filing before the due
You have to remember that the due date for filing form 1099 NEC is 31-Jan-2023 and both eFiling and print/mail should be done on or before the due date to avoid IRS penalty.
5 Useful Tips To Report Correctly
#1 – Avoid reporting personal expenses
Differentiate personal expenses and business expenses with this simple fine line.
Business Expenditure: If it is absolutely reasonable, necessary, and required for your business to operate, then such an expense can be considered a business expense.
Personal Expenditure: 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 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.
#2 – Mail 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.
#3 – Electronically send W-9 Forms Online to vendors
Before you start reporting any payments you have made to vendors, make sure that you have their name/business name and TIN. Send W-9 forms, as soon as the vendor starts working with you, 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.
#4 – Check state-wise 1099 reporting guidelines
1099 forms are usually a part of the Combined Federal/State Filing Program (CF/SF). The newly introduced 1099-NEC form is also a part of this program. The states participating in this program are Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Wisconsin.
The states with no 1099-NEC filing requirements are Alaska, Florida, Illinois, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming.
When reporting nonemployee compensations (payments amounting to $600 or more) online please make sure to submit the filing & mail the hardcopy before the due date of 31-Jan-2023.
Taxseer is a leading IRS-authorized e-file service provider offering you the best cloud-based solutions to perform online filings of Forms 1099 series, W-2, ACA (1095-B & 1095-C), 2290, 8849, 8809 and many more. We provide Wizard-driven e-filing for guided and error-free submissions and extend the security, intelligence, availability, and agility of the tax solution on the cloud. SSL-encrypted connections are used for transferring sensitive information and providing a very safe environment for clients. As part of our commitment to making e-filing easy and convenient, we are always available.