The tax form 1099-MISC, Miscellaneous Income, allows business owners to report funds paid to independent contractors to both the contractor and the Internal Revenue Service. According to the IRS, the 1099-MISC must be filed with the IRS by January 31 whether it's filed electronically or on paper. When the filing deadlines are missed, the IRS charges penalties based on how late the returns are filed.
Penalties for filing a 1099-MISC form after the 1099 deadline start at $100 per form and go up the longer the form is overdue or for failure to issue a 1099 at all. There is a cap on the maximum fine per year which is lower for small businesses.
Penalty for Not Filing 1099
When your business pays a sole proprietorship or partnership a total of $600 or more in a year for services rendered, a 1099-MISC must be sent. In addition to reporting independent contractor work, the 1099-MISC also covers royalties, prize winnings paid out by your business, rental payments and non-employee compensation for mileage, bonuses, car expenses, awards and commissions. The IRS publication "Instructions for 1099-MISC" specifies each potential recipient of the form and also contains updated information about filing changes since the previous tax year.
The IRS uses a tiered structure to levy penalties for late filers. The later your 1099-MISC forms are filed, the higher the penalty. If you file your information return within 30 days of the original January 31 due date, a fine of $50 per return must be paid with a maximum fine of $536,000 per year. If you are later than 30 days but before August 1, you face a penalty of $100 per return and a maximum fine of $1,609,000 per year. Filing after August 1 means a $260 per return fine with a $3,218,500 maximum. The IRS does cut small businesses some slack by reducing the maximums to $187,500, $536,000 and $1,072,500 per year when your average annual gross receipts are less than $5 million for the past three tax years.
Maintaining the goodwill of those supplying your company with needed services will help your company avoid a contractor relations problem. The prompt issuance of 1099-MISC forms and other information returns to intended recipients helps your business avoid hostility from proprietors who require the paperwork and earnings totals to file an individual income tax return for the year.
Streamlining the process of issuing 1099-MISC forms may help your business avoid passing the filing deadline. Require all new contractors to fill out a Form W-9, Request for Taxpayer Identification Number, before starting a job to avoid an end-of-year rush to acquire the necessary data for the information returns. Keep a running spreadsheet or accounting software log of all funds paid to each independent contractor instead of tallying the numbers separately in January. All a 1099-MISC form needs is your tax information, the recipient's information and the total earnings. When you keep this data updated at all times, all you need to do in January is fill out the forms.
1099-MISC Recipient Penalties
If an independent contractor who receives a 1099-MISC from your business fails to file the form with the IRS and pay tax due, he also faces a penalty. When an underpayment of income taxes occurs due to his not reporting the miscellaneous earnings, a penalty of 20 percent of the underpaid amount is levied. For example, if $100 in additional taxes were due based on contract work earnings, the penalty is $20.
2018 Tax Law Changes
As of 2018, the maximum penalties for not filing 1099s rise to $536,000 for 30 days or less, $1,609,000 for filing by August 1 and $3,218,500 for filing after August 1 or not at all.
For 2017, the maximum penalty levels are $532,000, $1,596,500 and $3,193,000.