As a business owner, you are probably aware that the Internal Revenue Service (IRS) requires you to provide W-2’s to all of your employees—and a Form 1099-MISC to “non-employee’s” or so-called “independent contractors.” But did you know that there have been significant changes in the reporting deadlines and filing requirements for these forms beginning in tax year 2016?
Who needs to be issued a 1099?
There has always been a bit of confusion about who needs to receive a 1099. Those rules have not changed. Generally speaking, you are required to issue a 1099 to any person, or vendor or sub-contractor to whom you have paid over $600.00 in the course of a business year.
Basically, that is any person or company you have paid for services that isn’t “an employee.” That includes sole-proprietorships, partnerships and Limited Liability Corporations. The exception would be entities operating as S or C-Corporations.
What is new for 2016?
The IRS has made a significant change to the W-2 series and 1099 filing deadline. This change can severely impact not only your ability to file these forms on time but your ability to make sure the forms are submitted without discrepancies.
Starting in tax year 2016, Form 1099-MISC now must be filed on or before January 31, 2017 when you are reporting nonemployee compensation payments in box 7. In the past, payees received their 1099 on January 31, but they were not due to the government until February 28 or March 31, which gave businesses more time to find and correct errors.
This new deadline includes forms W-2 and W-3. These must be filed with the Social Security Administration (SSA) by January 31. You can request an extension but it is no longer an automatic extension, so there is no guarantee that it will be granted. In fact, the IRS has stated they will grant extensions on a very limited basis.
Now that your 1099 recipients and the IRS will be getting their earnings information simultaneously, you will have less time to catch potential errors—and could be subject to penalties.
The penalties for failure to correctly and/or timely file forms are as follows:
- $50 per 1099 not more than 30 days late
- $100 for 1099s filed before August
- $260 after August 1 8/1 and for any taxpayer identification number (TIN)/name errors
- $530 for intentional failure to file
These penalties can be imposed for failing to provide the IRS correct information and failure to provide the payee with correct information—so all the penalties listed above can effectively be doubled for each 1099 not filed correctly.
There is a “safe-harbor for de minimis errors,” wherein there are no penalties for failing to file correct returns if the error is $100 or less ($25 or less if it involves withholding tax). Such errors are not required to be corrected.
How to ensure compliance with the new rules
With the steep penalties for reporting errors (or missing the new deadlines) taking effect January 1, now more than ever it is imperative that you obtain all the information you need on your subcontractors as early as possible.
You should start compiling the 1099’s before year end and then update them if needed. Be sure to obtain a W-9 from all payees that will need a 1099 before you start paying them in order to have the social security or TIN available. Consider verifying the TIN provided to you with the IRS’s online matching service.
If you are not sure which of your sub-contractors you need to provide with a 1099—or if you are not sure you can meet the deadline requirements in time to avoid penalties—contact your tax professionals.
Steven Blumenthal, CPA is the principal of MBAF CPA’s LLC, located on 440 Park Avenue South, New York, NY 10016. He can be reached by telephone at (212) 931-9254 or email at firstname.lastname@example.org. Compliance with and understanding the difference between scams and legitimate income tax problems can be complex. If you would like to benefit from MBAF CPA’s LLC’s expertise in these areas, or if you have further questions on this advisory, do not hesitate to contact their tax & accounting specialists at (212) 576-1400.