No matter who you are, keeping track of your money is important. Whether it’s funds that are coming in or going out, you should always be aware of your finances.
If you’re a construction contractor, then you know just how important it is to keep tabs on your accounting and finances.
In addition to ensuring that your books are covered and accurate, you also have an IRS filing requirement to deal with.
As a contractor, you’ll be dealing with an IRS Form 1099.
Today, we’ll discuss just what exactly this form is, the different types of 1099s, what the penalties are for incorrectly filing one, and finally, how to make sure you avoid penalties.
What is an IRS Form 1099
1099 Forms are what you’ll be issuing to each of your contractors who do work with you. While someone earning a salary or wage will report their annual earnings through a W-2 form, a contractor will fill out 1099-MISC.
You should be sending any contractor that you pay at least $600 during the tax year one of these forms.
Other types of 1099 Forms
1099s for interest and dividends – This form is used to report the dividends and other distributions you receive from your stock investments or mutual funds.
1099s for government payments – The government is also responsible for reporting income that it pays to taxpayers. Government agencies use form 1099-G to report state income tax refunds and unemployment compensation.
1099s for withdrawals from retirement – When you take money out of your traditional IRA, you will get what is called a FORM 1099-R. This form also pertains to other types of distributions you receive from pension plans, annuities, and profit-sharing plans.
1099s for debt cancellations – If a creditor ever cancels a portion of your outstanding debt, the IRS, unfortunately, treats that cancelation as income. So, you will need to report that on a Form 1099-C.
Now that you are familiar with what a Form 1099 is, as well as the many different variations, let’s talk about the importance of filing them correctly.
What Happens if You Don’t File it Right
It’s important that you send out 1099s in time, as failure to do so may end up in penalties for you or your contractors.
In addition to making sure that your 1099 is filed on time, you also have to make sure that you don’t have any errors on the form, such as forgetting to include their Employee Identification Number
Currently, here are the fines that are associated with fillings that are past due:
Submission within 30 days from the due date – $30 penalty per form.
Submission after 30 days from the due date but before August 1st – $60 penalty per form.
Submission after August 1st or not filed at all – $100 per form.
The IRS sets the maximum penalty as $500,000 for small businesses, which is characterized as a business that has average annual gross receipts of less than $5 million for the three previous tax years.
Exceptions for Delays
If you are late on your submissions, you may be okay as long as it falls under a “reasonable cause,” as the IRS will not impose penalties in those situations.
Typically, a reasonable cause is something that caused a delay in the submission that was outside of the taxpayer’s control, such as a computer breaking down or a fire in your office.
That being said, you must be able to show that you took reasonable steps to avoid being late, as well as taking action to mitigate the delay.
In addition, the IRS will overlook inconsequential errors or omissions in forms that necessitate correction and re-submission.
Working With Contractors – How to Make Sure You File Yours Correctly
If you want to avoid those costly fines and penalties, here is how to correctly file your 1099 when you employ contractors.
Check, Double Check, and Triple Check Your Work
Making sure that all your information is correct from all your contractors and vendors is your first priority. For vendors, you should already have their name, address, SSN and Employee Identification Number from their W-9s. In addition, the W-9 will also detail their tax filing status and so you’ll be able to see whether or not you need to issue a 1099 for each specific vendor.
To ensure that any contractors you’ve worked with avoid “backup withholding” from the IRS — which is when the IRS withholds a portion of the contractor’s pay because of omitted information or if they don’t have a W9 — you check with each contractor to see if any of their information has changed.
Acquire Your 1099s
Once you’re confident that the information you have is correct, you can then order the 1099 forms by either calling the IRS (1-800-829-3637) or by visiting their website. This is because you cannot download a 1099-MISC.
However, if you don’t want to file these forms the old-fashioned way, you can use financial software like QuickBooks to create, distribute, and file you 1099s all from the ease of your computer. This route is highly recommended, as it will simplify the process a ton.
And, if you’re new to QuickBooks, then you’re in luck. Here at 24hr Bookkeeper, we are well versed in QuickBooks. We offer extensive QuickBooks training, both in individual and group settings.
This is in addition to our construction software integration, financial updating, workflow advisory, and monthly bookkeeping services as well.
So, if you want to get started in implementing QuickBooks into your construction business’s operations, then contact us today! We’ll make sure that you’re confident in using QuickBooks in no time!
Fill Out and Send Out Forms
Filling out the forms is pretty standard, just make sure that you are writing down the proper SSN and EIN, as well as the amount of money paid to each contractor – which should be written in Box 7 under “non-employee compensation.”
Once again, if you use software like QuickBooks for your 1099 process, it will automatically keep tabs on this information, which will reduce the likelihood of error and save you valuable time as well.
Next, you have to send the forms and either mail or hand each 1099 Copy B to your contractors by February 1st.
Failure to meet this deadline can lead to the IRS penalty fees.
It’s important that these forms are mailed to contractors on time because they need them to make tax payments, report their total amount earned, and finally file Form 1099-MISC.
Mail Form to IRS
Make sure that you give yourself ample time to mail Form 1096 — which summarizes the total from your returns — and Copy A of each Form 1099 to the IRS.
If you are reporting nonemployee compensation payments, it needs to be filed on or before January 31st.
For all other reported payments, file Form 1099-MISC by February 28, 2020, if you file on paper, or March 31, 2020, if you file electronically.
Key Takeaways for avoiding penalties with your 1099s:
- Pay attention to deadlines in order to avoid fines
- If you experience a reasonable cause for being late, make sure you still try and submit your 1099s as soon as you can. This will help your case in terms of avoiding a fine.
- Make sure that the information you have for your vendors and contractors is correct
- Using QuickBooks will help ensure accuracy for your 1099s
- Pay attention to mailing dates for when you are sending 1099s to contractors