Beginning in 2020, Form 1099-NEC replaced Form 1099-MISC for the reporting of nonemployee compensation. Form 1099-NEC isn’t a new reporting tool. It was used decades ago but mothballed in 1983 when Form 1099-MISC replaced it. To learn more about the events leading up to 1099-NEC’s reinstatement, read our article Introducing the IRS’s “New” Form 1099-NEC, Nonemployee Compensation. As taught in our Form 1099-NEC & 1099-MISC training course, all businesses, nonprofits, and government agencies must file Form 1099-NEC when they make certain payments.
Lax Days Are Dead: Not long ago, 1099 forms, including those that reported nonemployee compensation, were little more than an afterthought for small business owners. And why not? The penalty for avoiding the hassle was minor and seldom enforced. But, be forewarned – lax days are over.
Small Business Enforcement: Over the past decade, Congress and the U.S. Treasury have taken aggressive steps to ratchet up enforcement of Form 1099 small business compliance. Why? Their studies reveal two crucial facts about 1099’s and small businesses:
Tax Gap Conclusion: The conclusion of these studies is obvious and financially stunning. The most significant contributor to the nation’s tax gap (tax revenue lost each year due to noncompliance) is small business owners. Small business – let’s call it what it is – tax fraud accounts for approximately 40% of the entire tax gap. That’s over $150 Billion of tax revenue lost every year. Why? Simply because small business owners fail to file their 1099’s, particularly Form 1099-NEC.
Enforcement Ramp-Up: Congress and the Treasury Department had been struggling to reduce the small business tax gap for decades with no measurable result. Then, in 2011, seemingly out of sheer frustration, the IRS added 1099 perjury questions to all business returns. These questions require owners to make two statements under oath:
These questions got added to tax returns the same year that Congress increased the financial consequences of noncompliance.
In the most recent enforcement action (2015), Congress doubled penalties for 1099 noncompliance for a second time and pegged them to inflation. The penalty for not filing information returns, including Form 1099-NEC, increased to $250 for each form. The Intentional Disregard penalty increased to $500 each. These penalties are now substantially higher due to inflation. Owners need to be especially aware of the fact that the 1099 perjury questions make it extremely easy to levy the intentional disregard penalty. For more information, please read our article, The 1099-NEC Perjury Trap.
Double Whammy: It’s also time for owners to recognize the fact that these penalties can be applied separately to 1) Not filing the forms with the IRS, and 2) Failing to provide a copy to the recipient. This rule effectively doubles the penalty for each 1099, making the potential penalty for each 1099-MISC over one thousand dollars!
Noncompliance is Risky Business: The days of brushing off 1099’s should be over for your business. Most owners have to file at least a few 1099-NEC’s and many are also required to submit Form 1099-MISC, especially for rents. The risk taken by not filing required 1099s can put you out of business. For example, the failure to file a mere seven 1099-NEC for three years can cost a small business over $21,000, plus interest!
Take Away - Protect Yourself: Business owners should learn the 1099 rules if they want to avoid trouble. Do not rely on an outsourced bookkeeper or tax professional to handle this for you. They seldom have the information needed to file your 1099’s and tax season starts too late for tax pros to meet the deadlines.
Helping you and your employees understands the ins-and-out of 1099 reporting is why we created the Form 1099-NEC and 1099-MISC Training Course. This course teaches everything you need to know to keep your business (and your clients) in Form 1099-NEC compliance.
Additionally, form 1099’s sister-course, Employees vs. Independent Contractors will help you steer clear of another business killer, worker misclassification.
We hope you’ll check them out.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
I just completed the 1099-NEC/MISC course - this was very helpful to me. It is greatly appreciated.- Tammy L, Anchorage, AK, 1099-NEC & 1099-MISC Training Course Course
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
Your video class on this issue (HOA taxes) has given me the confidence to go forward.- Desmond, Frederick, MD, 1120-H Basics Course
I haven’t practiced in the accounting field in quite some time and wanted a refresher. The Overnight Account course 1099-Misc Basics was very helpful! It was simple to follow along and understand each section. I would highly recommend this course! Staff were quick to answer my question as well. I love that I can review the modules again, if needed, at any time. I will definitely be using them again for more classes.- Tammy, Anchorage, AK, 1099-MISC Basics (Training Edition) Course
The course was excruciatingly detailed, which I appreciate. I definitely recommend this course to anyone who even thinks they may need it.- Greg, Brookfield, IL, 1099-MISC Basics Course