Did you get a notice from the IRS about Form 1099 rejection? Then you need to correct the error and send the corrected information return to the IRS and the recipient. The IRS uses 1099 Tax Form information to match the contractor tax return form.
Getting tensed? Don’t worry! We will let you know the most common mistakes to avoid Form 1099 rejections. Additionally, we provide you information to avoid IRS Form 1099 penalties.
Misunderstanding 1099 Form
In general, there are 20 variant 1099 Tax Forms in the 1099 series. They look similar but serve different purposes. Moreover, each information return has specific tax-reporting requirements. For instance, you might issue Form 1099 R to report the distributions made from pensions, annuities, IRAs, etc. Or else if you hire an individual who performs services related to business, you may issue Form 1099 NEC. Along with earning benefits as a business owner, you’re responsible to report the income paid to contractors using a correct 1099 Form. Suppose, if you issue a 1099 MISC Form for a non-employee who performed work as a logo designer for your business, the IRS may reject the information return. As per the 2020 guideline, businesses must issue a 1099 NEC Form to report non-employee compensation paid to an independent contractor.
Reporting incorrect amount
As we know, 1099 information returns are not only issued to the contractors but also the IRS. The IRS checks whether the contractors are reporting their 1099 income on the tax return or not. If the taxpayer enters an incorrect amount on 1099 Form and issues the same form to the IRS and contractor, then the taxpayer may have chances to face IRS audits. However, the contractor files a tax return to report the income earned other than salary with the IRS. The IRS matches the 1099 Form with the tax return form and imposes a penalty on the taxpayer for fraudulent filing 1099 information return.
Misclassifying an individual
One of the main reasons for the IRS to reject Federal 1099 Forms is due to misclassifying the individual. Generally, 1099 tax returns are filed by the business owners to report income paid to an independent contractor. In case, if you file Printable 1099 to report the salary paid to an employee, the IRS may reject the information return. Use Form W-2 to report salaries or wages paid to employees. Furthermore, use an appropriate 1099 Tax Form to report miscellaneous income, non-employee compensation, dividends, interests, etc.
Writing off personal expenses
According to the IRS, fillable 1099 Forms are used to report income paid to an individual who performs work-related for business or trade. So, the taxpayers must not report income paid to contractors for personal purposes. If in case, the taxpayer writes off the personal expenses paid to a contractor the form may be rejected. For instance, if you pay a carpenter for designing furniture related to business $600 in a tax year, you need to issue a 1099 NEC Form. If the same carpenter designs furniture for personal use, then you should not include the expense paid to the contractor. When you report income paid for personal use on a 1099 tax return, the IRS may penalize you.
Not keeping adequate records
As per the IRS rules, every business individual must maintain adequate records of income paid to 1099 workers for performing contract work. With the help of record-keeping, one can easily file a 1099 Tax Form at the year-end without any error. Furthermore, the business owner is responsible to collect W-9 Forms from the contractor before starting the first payment. With the help of the W-9 Form, taxpayers can be relieved from committing errors like invalid TIN, incorrect name of the payee, etc. Furthermore, the taxpayer can easily identify the type of contractor i.e., sole proprietorship, C or S corporation, an LLC, etc.
How to avoid Form 1099 rejection?
Mistakes can lead to steep penalties and fines. Here are some tips to avoid Form 1099 rejections:
- Identify the individual before reporting the income paid. If you paid an individual as wages, the individual is an employee. Or if you paid an individual on a contract basis, the individual is a contractor.
- Ensure to summarize the income paid to the contractor throughout the tax year. Furthermore, include the correct amount in the appropriate box of the respective 1099 Form. For example, if you paid an individual as the rent of $600 in a tax year, then include the amount on Form 1099 MISC box 1.
- Make sure to correct errors like invalid TIN, name of the payee, etc as soon as possible. Re-send the corrected Forms to the IRS and the individual before reaching the 1099 deadline.
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