3. Check your calculations
The IRS reported about 9 million math error notices in 2021, mostly due to stimulus payments. However, even before the pandemic, the revenue service reported 2.5 million errors in 2017. These mistakes usually range from simple mathematical operations to selecting the wrong value from tax schedules. Usually, the IRS will send you an error notice that will inform you where the mistake occurred as well as your new tax refund or deficit, depending on the new computations. This error notice can cause a delay in your business’ return.
While you can recheck your computations and filings before you submit them, the best option to avoid math errors in your 1099 form is to use tax software. Usually, you’ll only need to input the necessary details, such as your income records, and answer a few questions and the software will fill up the proper form for you.
4. Submit by the deadline
Most of the 1099 form types have the same deadline, which is usually by the end of March for the following year. The 1099-NEC form, which reports non-employee compensation, is usually due at the same time as the W-2 form or the Wage and Tax Statement. To avoid getting swamped with the last-minute preparations, make it a habit to keep all your invoices and receipts concerning all payments made to you as well as your expenses–making a good bookkeeping practice for you and your business.
Failing to file your tax returns on time, including the tax extension, will lead to a late-filing penalty of 5% of the tax you owe for every month your payment is delayed. It is capped at 25% or five months. To avoid this penalty from failure to file, consider filing and submitting your return by the due date even if the balance is not ready yet. There are separate tax penalties for failure to pay, failing to pay the right estimated tax, and even issuing checks without sufficient bank balances.
For businesses, the IRS will usually send a notice instructing you to respond. Remember that ignoring these tax notices could lead to more penalties and fines or worse, an audit from the IRS itself. Unlike individual tax-payers, failure to file for businesses ranges between 10 to 15% in penalties up to a maximum of 25%. Meanwhile, erroneous filing can lead to an accuracy-related penalty of 20% of the actual amount you owe the agency.
Another dreadful effect of not filing your taxes on time, including Form 1099-NEC for independent contractors, is the suspension of your benefits. It can even lead to property seizures for cases of severe tax failures.
5. Keep your tax returns
Although it sounds tedious and space-consuming in your office, it’s generally considered to keep a copy of your tax return for at least three years–something recommended for both businesses and individual taxpayers. This is the period of time that the IRS can legally conduct an audit based on instances of gross underreporting of income. On the other hand, you can keep your returns for two years after you paid the tax, or whichever of the two is later, if you’re looking to file claims for tax credits or refunds. The IRS also recommends keeping your tax records for 7 years if you’re planning to claim losses from bad debt reduction or worthless securities.
Taxation is an inevitable part of commerce and trade, yet it doesn’t have to be done haphazardly. By being diligent and present-minded as you go about it, plus developing long-term habits that make you understand the importance of proper filing of taxes, you can mold your company into a compliant and accurate taxpayer and issuer of tax forms for its employees. More than avoiding the penalties and potential audits down your way, it’s the convenience and peace of mind you get to enjoy knowing that you fulfilled your duty as a business owner and you will continue enjoying the benefits that your people will also enjoy.