If you’re in business, you probably hate sending them out. As a taxpayer, you probably hate receiving 1099s. The only one that likes 1099s is the IRS. The IRS loves them because allows them to keep tabs on ordinary taxpayers, even while it audits less than 2% of all individual tax returns. The IRS matches nearly all 1099s and W-2s (those are the wage report forms from your employer) against your 1040. Here are 12 things you need to know about the 1099s.
- There are many flavors of 1099
There’s a 1099-DIV for dividends; 1099-INT for interest; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions and barter exchanges; 1099-S for real estate transactions, etc. There are many categories, but the Form 1099-MISC (for miscellaneous) seems to prompt the most questions and covers the biggest territory.
- There are penalties for not sending them
This time of year they’re inevitable. Generally, businesses must issue the forms to any payee (other than a corporation) who receives $600 or more during the year. And that’s just the basic threshold rule; there are many, many exceptions. That’s why you probably get a Form 1099 for every bank account you have, even if you earned only $10 of interest income. There are penalties for filing late or not at all. In cases of intentional non-filing there is a loss of the deduction for payment.
- Timing is crucial
Normally, businesses must send out Forms 1099 on or before Jan. 31 of each year for the prior calendar year. Don’t assume you’re off the hook for reporting income if you don’t receive a Form 1099 by February or even March. There are penalties on companies who issue 1099s late, but I’ve seen some arrive as late as April or May.
- Recipients, beware of changed addresses
Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number. That means you have an interest in making sure payers have your correct address. Update your address directly with payers, as well as putting a forwarding order in with the Post Office. You’ll want to see any forms the IRS sees.Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number. That means you have an interest in making sure payers have your correct address. Update your address directly with payers, as well as putting a forwarding order in with the Post Office. You’ll want to see any forms the IRS sees
- Senders, make sure it matches your W-9
As a business, you are required to have the payee complete form W-9 in which they list their Name, Address and Tax ID number. This should the source of that info on the 1099. The IRS matches name and Tax ID number and sends you a letter for any mis-matches. There are penalties for mis-matches, but if you used the W-9 correctly, you can avoid the penalty. If you did not receive a W-9 by the time you pay over the the threshold for sending the 1099, you should withhold 31% backup withholding tax. Failure to do so could shift the burden to you.
- The IRS receives them, too
Any Form 1099 sent to you goes to the IRS too–often a little later. The normal deadline is Jan. 31 for mailing 1099s to taxpayers, but the payer has until the end of February to mail all its 1099s to the IRS or March 31 to e-file them. Some payers do send them simultaneously to taxpayers and the IRS. Most payers mail taxpayer copies by Jan. 31, and then wait a few weeks to collect all of the IRS copies, summarize them and transmit them to the IRS, usually electronically. That’s important knowledge, as you have time to correct any errors.
- Those darn boxes
Pay close attention to what boxes the amounts are reported on. Form 1099-misc has different boxes “classifications” for different types of income. For example there are boxes for Rent, Non-Employee Compensation, Other Income, etc. The box the income is reported on is where on your return the IRS will look for that income and there is different tax treatment for different income.
- Report errors immediately
The time delay means you may have a chance to correct obvious errors. So don’t just put arriving 1099s in a pile; open them immediately. Suppose you get a 1099-MISC on Jan. 31 reporting $9,000 of pay, when you know you received only $900 from the company that issued the form? Tell the payer immediately. There may be time for the payer to correct it before sending it to the IRS. That’s clearly better for you. If the payer has already dispatched the incorrect form to the IRS, ask the payer to send in a corrected form. There’s a special box on the form to show it is correcting a prior 1099–so the IRS doesn’t just add the amounts together!
- Report every 1099
The key to Forms 1099 is the IRS’ computerized matching. Every Form 1099 includes the payer’s employer identification number and the payee’s Social Security (or taxpayer identification) number. The IRS matches nearly every Form 1099 with the payee’s tax return. If you disagree with the information on the form but you can’t convince the payer you’re right, explain it on your tax return.It is ok to report more income than the total of 1099s you receive, just don’t report less. There’s no perfect solution, but one thing is clear: If you receive a Form 1099, you can’t just ignore it, because the IRS won’t.
- IRS notices
No one likes a tax audit, and there are numerous tales about what will provoke one. But this much is clear: If you forget to report the $200 of interest you earned on a bank account, the IRS will send you a computer-generated letter billing you for the tax on that interest. If it’s correct, just pay it.
- States receive them too
Most states have an income tax, and they will receive all the same information the IRS does. So if you missed a 1099 on your federal return and receive a notice from the IRS be aware that your state will probably catch up with it, too.
- Don’t ask, don’t tell
Keeping payers advised of your current address is a good idea, as is reporting errors to payers. But that’s where I’d stop. In other words, if you don’t receive a Form 1099 that you expect, don’t ask for it. You do not have to attach 1099s to your return like you do with W-2s. If you are expecting a Form 1099, you no doubt know about the income, so just report that amount honestly on your tax return. The IRS computers have no problem with that. In my experience, if you call or write the payer and raise the issue, you may be buying trouble. The payer may issue the 1099 incorrectly. Or you may end up with two of them, one issued in the ordinary course (even if it never got to you) and one issued because you called. The IRS computer might end up thinking you had twice the income you really did.
Forms 1099 are a vital part of the IRS’s computer matching program, and nearly all of us receive payments reported in this way. Take these forms seriously. I assure you the IRS does