Following all the IRS rules can be a pain. Some of their rules take time out of your day and don’t really seem worth the effort. It’s also common to get bad advice in this regard. Here’s an example: A business owner finds a new worker and that person says “Don’t send me a 1099”. It might not seem like a big deal, but not sending a contractor a 1099 is not taken lightly by the IRS.
I worked with a painter who was audited by the IRS before I met him. Here is how that interaction went for him, during his audit…
The IRS wanted to see his bank statements of all the transactions he made. They wanted to see the amounts of money withdrawn from the painter’s business bank account.
The IRS asked the painter, “What was this cash used for?”
The Painter replied “That money was used to pay my employees”.
The IRS questioned him, “Did you send those people 1099’s?
The Painter responded with, “No, I did not”.
The IRS retorted, “How are your contractors going to pay their taxes if they did not receive a 1099?”
The Painter was confused, as he was new to the country, and not familiar with the rules.
The IRS then finished the conversation with their reply, “Then you will have to pay their taxes for them, because you sent them no record of their income.”
Yikes! That was a hard lesson learned. His response was, “I didn’t know I had to do that” and it was not sufficient for the IRS. Ignorance of the law will not excuse these cases.
The most important 1099’s that need to be sent and watched closest by the IRS are the 1099-NEC. The term NEC stands for non-employee compensation.
The reason why 1099-NECs are closely watched by the IRS is that many companies show large deductions for contractor expenses on their business tax return (S Corp return, Partnership Return, C Corp return) or business schedule C of their personal tax returns.
For example, if a company deducts $100,000 in contractor’s expenses on their 2024 S Corp tax return, the IRS wants to make sure that all 1099-NEC’s that were sent to the independent contractor add up to $100,000.
The deadline to file 2024 1099’s with the IRS and send those 1099’s to your contractors is 1/31/2025. Even if you miss the deadline, it’s important to get them completed shortly after. We have filed many 1099s for business owners, so please reach out if you would like assistance.
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