Will the IRS Know If I Don’t File a 1099?
Don’t you just love being self-employed/having a side hustle? It’s so liberating to work for yourself and to be free of all those rules in the workplace that frankly kill you vibes. The freedom, lack of rules, not having to deal with administrative BS… It’s what makes freelancing so great! I think you can all agree with me on this one, freelancing is amazing!
Hold the phone. Those things we just finished discussing… Freedom… Lack of Rules… Not having to deal with administrative BS…
Unfortunately there is this big government entity that heard that freelancers are having such a good time and they just couldn’t stand for that. So they set out to take away some of your freedom by establishing some rules that you have to follow by forcing you to do some administrative BS.
If you have any complaints please remit them to the Internal Revenue Service, also known as the IRS. In order to save you from ignorance to some of these rules the IRS has put in place I want to go over one of the most important things to know for a freelancer in this article: the 1099.
In this article, we'll go over what a 1099 form is, will the IRS know if you don't file a 1099, and what exactly to do if you receive a form yourself.
What is a Form 1099?
The Form 1099 is the tool the IRS uses to get an idea of how much self-employed people make any given year. As a freelancer you will most likely be receiving plenty of these forms in the foreseeable future. This article is going to focus on your responsibility to file 1099’s and not what to do when you receive one yourself. If you would like more information check out this article on what to do when you receive a 1099. Since the IRS does not care about your convenience, they are putting the toll on you to give them some specific details about who you are paying and how much you are paying them.
What Happens If You Don't File A 1099...
In short, if you don't file a 1099, you're almost guaranteed to get a tax or an IRS audit notice. The IRS will track you for your taxes owed. It is your responsibility to pay for the taxes you owe even if you don't receive a 1099 form from your employer or payer (the deadline for them to mail out 1099s to contractors is January 31st). Make sure you include all of your earnings in your tax return.
So What Exactly do I Have to Do?
Luckily filing 1099’s isn’t rocket science. In fact, here's a 1099 tax guide to walk you through it. It may seem scary at first but let me tell you: it’s literally filling out a form/forms and mailing them into the IRS. It’s probably one of the easiest filings to do – if you are organized… And if you are anything like most of the clients I deal with on a day to day basis you could probably get more organized! So in an effort to help you out here is a checklist that you can use to be a 1099 filing pro:
Did you pay anyone over $600 total in a year for services?
- If yes, continue
- If no then you are off the hook, no need to file 1099’s!
You need to gather the following:
- Person/company’s name
- Their social security number/EIN (if a business)
- The amount that was paid to them during the tax year
Once gathered you can fill out a form 1099-NEC.
Starting in 2020 payments to freelancers should be reported on a 1099-NEC, not on a 1099-MISC like it always has been done (leave it to the IRS to try to fix a system that wasn’t broken)
IMPORTANT: you should purchase official 1099 forms (available from most office retailers, or via Google) and submit those to the IRS. Since the IRS loves to make your lives more complicated they have a very specific form that they use to match up with their scanning software. I would use those instead of pulling a fillable form off of the internet to avoid any possible penalties/fees.
In addition, fill out a form 1096
This goes hand in hand with your 1099’s. It essentially adds up all of your 1099’s and sums it up on a single sheet. Again, I recommend getting an official 1096 form from a retailer.
Once completed you can mail the 1096 and 1099’s to the IRS.
Send a copy of your 1099’s to the people you are issuing them for so that they can include them on their taxes. This can be electronic, so you don’t have to go through the hassle of guessing how many stamps you need to mail that manila envelope, because I know that we have all been there.
See how easy it really is? Yeah it’s some extra paperwork but they aren’t asking you to calculate the mass of the sun (which is 1.989 × 10^30 kg by the way). If you have all of the info listed above and dive right in it shouldn’t take more than an hour or two to complete the whole process.
… Well What if I Just Don’t Want to?
Completely valid question. I mean us as human beings are very consequence driven, are we not? On your tax return you are required to disclose if you were required to file 1099’s. Here is a screenshot of where they ask that question:
So if you check “no” on line I then you are telling the IRS you weren’t required to issue anyone a 1099. That usually makes it so you don’t have to file 1099’s. However, if for some crazy reason you are one of the 0.45% of people that get audited every year and the IRS looks at your records and sees that you should have issued 1099’s then you might be on the hook to file them and pay the penalties. Yes, the IRS is the arch enemy of all things good and they will charge you for not filing forms when you should have. Here are the penalties for not filing your forms 1099:
- If you correctly file within 30 days of deadline: $50 per form
- If you correctly after 30 days and by August 1: $110 per form
- If you correctly file after August 1: $270 per form
As you can see the per form penalties can pile up and end up costing you some money. So as a tax professional I encourage you to file these forms timely each year, since you have seen really how easy they are to fill out.
So there you have it. You are now an expert on yet another tax topic. I wish you luck on your future interactions with our good ‘ole Uncle Sam and encourage you that if you have any additional questions to reach out to a certified tax advisor for help.