We often receive questions from clients about 1099 compliance and how changes in the tax code or IRS requirements might affect their business. The IRS Form 1099 series serves as a cornerstone for ensuring the accurate reporting of various types of income. Missteps can lead to penalties, so staying up-to-date on the rules — especially heading into 2025 — is essential. Below is an overview of key points and best practices to keep in mind.
The most common one is:
Form 1099-NEC (Nonemployee Compensation)
Used to report payments of $600 or more to independent contractors or service providers.
Below are important thresholds to keep in mind:
Nonemployee Compensation (Form 1099-NEC)
You must file Form 1099-NEC for any individual or unincorporated entity to whom you’ve paid $600 or more in nonemployee compensation during the year.
Ensuring timely filing is a major component of 1099 compliance. Generally:
For Form 1099-NEC, continue to plan for a January 31, 2025, filing deadline both to recipients and the IRS.
Failing to Collect W-9s Early
Before you pay a new vendor or contractor, it is best practice to collect Form W-9 (Request for Taxpayer Identification Number and Certification) from them. The W-9 provides the correct name, business structure, and Taxpayer Identification Number (TIN) you need to prepare accurate 1099 forms.
Incorrect TIN Matching
Errors in the TIN (or name) on 1099 forms can trigger IRS notices or lead to potential backup withholding. Utilizing the IRS’s TIN matching system can help reduce these errors before filing.
Missing or Late Forms
Failure to furnish 1099 forms to recipients or to file with the IRS by the deadlines can result in escalating penalties. These penalties may range from $50 to $290 per 1099 form, depending on how late the forms are filed. In cases of intentional disregard, the penalty can be significantly higher.
Misclassifying Workers
Worker misclassification (treating an employee as an independent contractor) can lead to audits, back taxes, and penalties. Ensure your worker classification processes adhere to IRS guidelines, especially if you have contractors who only work for your organization.
Overlooking State Requirements
Some states have additional 1099 filing requirements or require direct submissions to state tax agencies. Make sure to research your state’s rules or consult a tax professional to ensure you’re fully compliant.
Create a Vendor Payout List
Maintain a robust internal system that tracks and flags vendors or contractors who may require 1099 reporting. Ideally, this system should integrate with your accounting software to automate data collection and retrieval.
Use Electronic Filing
Whenever possible, file your 1099 forms electronically. E-filing reduces errors, speeds up the process, and extends your filing deadline for most 1099 forms to March 31.
Conduct Periodic Reviews
Review your records each quarter to identify new contractors and vendors that will require 1099 forms. This helps avoid year-end bottlenecks and potential errors in reporting.
Stay Updated on Legislative Changes
Keep an eye on IRS announcements and legislative changes that may alter reporting thresholds or deadlines. Legislation that impacts the 1099-K threshold or introduces new guidelines often arises toward the end of the year, so timely awareness is key to avoiding surprises.
While the fundamentals of 1099 reporting remain the same, slight changes in due dates and thresholds happen from time to time due to legislative updates or IRS administrative decisions. Some areas to keep a close watch on include:
1099-K Thresholds
The IRS has been considering the potential enforcement of a $600 reporting threshold for third-party network transactions, but implementation has been delayed multiple times. Whether this will fully take effect in 2025 depends on ongoing legislative developments.
State-Specific Requirements
Some states may alter their own 1099 filing requirements. Plan ahead by verifying any new or updated rules in the states where you operate.
E-Filing Mandates
The IRS has been gradually pushing toward mandatory e-filing for businesses that file a certain volume of returns. Keep an eye on whether your business might be required to e-file in 2025.
We generate a 1099 vendor payout report for you as part of the December CPA review. We will use the approach below to identify independent contractors who paid over $600 in 2024 and list the vendor name and the booked payout amount in the report. Once you have the report, please review, confirm, and follow the guidance to collect other vendor information, such as their W-9 form, addresses, and TIN, to file a 1099. Our approach: we will identify vendors that you have paid out $600 or over throughout 2024 under any of the following accounting categories: 1) Independent contractor, 2) professional services, 3) “contractor” or “contractor service” 4) under Gusto’s “contractor” CODE - CDN. If you have any questions, please contact us at support@mypocketcfo.com.
1099 compliance remains a critical element of financial and tax strategy. Even small oversights—like missing a form, providing incorrect TIN information, or filing late — can result in penalties and unwanted scrutiny from the IRS. By planning ahead, verifying vendor information upfront, and staying informed about regulatory changes, you can avoid many of the common pitfalls.
If you have questions or require assistance with your 1099 filing, don’t hesitate to reach out to a qualified tax professional or our team at support@mypocketcfo.com. Our goal is to ensure your business meets all its compliance responsibilities efficiently and accurately, freeing you to focus on strategic growth as you head into 2025 and beyond.
Disclaimer: This article is intended for educational purposes only. It does not constitute legal or tax advice. For advice specific to your situation, please consult a qualified tax professional or attorney.