Tax Explainer: Understanding the importance of filing 1099s
Angie M Grainger
This Tax Explainer Article addresses the consequences of not filing 1099s and explores what to do if you are unable to obtain a W-9 form from a vendor.
1099 forms are used to report money paid to freelancers, independent contractors, and other non-employees. The IRS requires businesses to issue a 1099 form for any individual or entity to whom they have paid at least $600 in services, rent, or other income payments during the tax year.
Failure to comply with 1099 regulations can lead to significant penalties and consequences. Furthermore, obtaining a completed Form W-9 from vendors is a prerequisite for accurate 1099 reporting.
Consequences of Not Filing 1099 Forms
Failing to file required 1099 forms can lead to problems, both for businesses and the contractors they pay.
Penalties: The IRS imposes penalties for not filing 1099 forms, which can vary depending on how late the forms are filed. These penalties range from $50 to $280 per form, with a maximum penalty of over $1,000,000 per year for small businesses. The exact amount depends on how late the form is filed and the size of the business.
Audits and Scrutiny: Failure to file can also trigger IRS audits. An audit can be time-consuming, stressful, and may uncover other tax issues that were previously unnoticed, potentially leading to additional penalties and fines.
Disallowed Deductions: If a business fails to issue a 1099 form, the IRS may disallow deductions for those expenses, increasing the business’s taxable income and, consequently, its tax liability.
Challenges with Getting W-9s from Vendors
Before paying a vendor, a business is supposed to collect a W-9 form. This gives the details about the vendor and tells the business how to report the 1099 and withhold taxes.
Withholding Taxes: If a vendor refuses to provide a W-9, the IRS requires the business to withhold 24% of the vendor’s payment and send it to the IRS. This is known as backup withholding. The business remains compliant with IRS regulations by doing so, but it complicates the payment process and may strain business relationships.
IRS Notices and Penalties: If you fail to withhold taxes because a vendor did not provide a W-9, you may face penalties from the IRS. Additionally, if you issue a 1099 without a valid TIN, you could be subject to penalties for filing an incorrect form.
Strategies for Compliance
To avoid these complications, businesses should implement procedures to ensure compliance:
Vendor Onboarding Process: Establish a standard onboarding process for all new vendors that includes the submission of a completed W-9 form before any payments are made.
Regular Updates: Regularly request updated information from vendors to ensure that the W-9 information remains current.