Red Flags to Be Aware Of

Following all the IRS rules can be a pain, some things take time out of your day and don’t really seem worth the effort. It’s also common to get bad advice. 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. The IRS wants to see your bank statement transactions when audited. They see material amounts of money withdrawn from the painter’s business bank account. The IRS asks the painter “What was this cash used for?” The painter says “Well, that money was used to pay my employees”. The IRS asks “Did you send those people 1099’s? Painter responds “No, I did not”. IRS asks “How are they going to pay their taxes if they did not receive a 1099? Painter is confused, as new to the country and not familiar. The IRS finishes the conservation “You will have to pay their taxes for them as you sent no record of their income” Yikes! Hard lesson learned.

Unfortunately, saying “I didn’t know I had to do that” is not sufficient . 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 and please reach out if you would like assistance.

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