12 Tricky Filing Errors That Lead to a 1099 Penalty

Common 1099 Errors

The IRS requests 1099 forms to learn about a range of nonemployee transactions, including payments to freelancers and legal services. Sounds simple, right? You track transactions and then report them. But the challenge begins once you realize there are 20 types of 1099 forms with different deadlines. And that you must file one form per information return, whether you are doing one transaction or a hundred.Any mistake throughout the filing process can lead to penalization. If you are lucky, you realize you sent an incorrect 1099 form before the filing deadline, giving you time to file a new one and avoid penalties. But in some cases, you may not realize you made a mistake until the IRS sends you a tax notice or requests an audit.Fortunately, if you submit an incorrect 1099, you can re-file an error-free 1099 form in little time to avoid 1099 penalties, as long as you submit the corrected form before the filing deadline.

Common Paper Form 1099 Errors

You can file most types of 1099 forms electronically or by paper. The following are common errors that companies make when filing their 1099 paper forms.

1. Error Type 1

Error Type 1 refers to several paper 1099 form mistakes: incorrect code, checkbox, money amount(s), or filing a paper return when you shouldn’t have. While the IRS can penalize you for sending a 1099 form with these errors, you can follow four steps after submitting an incorrect 1099 to deliver a new error-free form and avoid penalties:

Fill out a form with all the correct information.

Check the “CORRECTED” box.

Include a new 1096 and Copy A (i.e., the 1099 copy that the IRS receives) to send to the IRS.

Re-file and mail the corrected 1099 to the recipient, IRS, and state tax agency, if required.

As long as you file forms on time, the IRS won’t penalize you for any of these mistakes.

2. Error Type 2

Error Type 2 is another group of 1099 paper form mistakes: missing or incorrect payee or recipient identification info, including the wrong Taxpayer Identification Number (TIN), or preparing the wrong paper form.Follow these four steps to avoid Error Type 2 penalizations:

Get a new Form 1099 and check the “CORRECTED” box. Fill it out exactly as shown on the original, incorrect return, but input “0” for all amounts.

Prepare another Form 1099 with all the correct information, but don’t check the “CORRECTED” box.

Fill out a new Form 1096 with the corrected information to send with Copy A to the IRS.

Re-file and mail all of these documents to the appropriate IRS Submission Processing Center.

As with Error Type 1 mistakes, the IRS won’t penalize these mistakes as long as you file them before the form’s filing deadline.

3. Missing state or local information on your paper form

When filing your 1099 paper form, it’s possible to write the wrong foreign postal code, province, or town. Without this data, the IRS can penalize you for not showing accurate nonemployee compensation.Unlike other paper form mistakes, don’t send a corrected 1099 form or a new 1096 form. Instead, contact your state or local tax department for help. They’ll help you fix this mistake before the IRS penalizes you.

Common Electronic Form 1099 Errors

The following is a common electronic form error to avoid.

4. Incorrect payer name and/or TIN (electronic form)

An incorrect payer name or TIN on an electronic form can lead to penalties of up to $280 per return.You can avoid penalties by sending a letter to the IRS that includes all the information in the image below.If you realize you reported the same information twice or made too many errors, contact the IRS’s customer service line at 866-455-7438.

Common Paper and Electronic Form Errors

The following are common mistakes to avoid while filing electronic and paper forms.

5. Failure to deliver a 1099 form on time

The IRS penalizes companies that don’t file proper 1099 forms on time.For example, companies must send the 1099-NEC (Nonemployee Compensation) form by January 31. If they don’t, the IRS charges between $50 and $280 per information return, depending on when you pay the penalty.

You can deliver your 1099 forms on time by researching a form’s due date as soon as you incur nonemployee compensations. So, if you’re hiring a freelancer, research the due date of the 1099 form that you’ll need to report this nonemployee compensation. Then, set up a calendar alert so that you don’t forget to file this transaction.Most 1099 forms share the same deadlines, so it’s easy to memorize due dates:

You can deliver any 1099 form via paper — except for the 1099-NEC and 1099-SB (Seller’s Investment in Life Insurance Contract) — before February 28. For each 1099 paper form you submit, you’ll also need to send a 1096 form — a form necessary to transmit the paper 1099 forms.

You can deliver any 1099 form online — unless it’s the 1099-NEC and the 1099-SB — before March 31.

If you think you won’t meet the due date, don’t give up yet! The IRS lets you file an Application for Extension of Time to File (e.g., paper or online 8809 form) by a return’s due date to get an automatic 30-day extension to file your 1099 forms.There are exceptions to these rules. For example, you can’t request an extension to file a 1099-NEC form. And while you can do it for the 1099-QA (Distributions from ABLE Accounts), you can only request an extension via paper.

6. Sending your 1099 forms in the wrong format

You can file any 1099 form — except for the 1099-QA — via paper. However, you must send electronic forms if you'll be filing 250 or more information returns yearly to avoid penalizations.For example, say you’ll send 270 1099-NEC forms and 230 1098 forms. In that case, you must send the 1099 forms electronically but can file 1098 forms on paper or online.So, as a rule of thumb, file your first or corrected 1099 form electronically if you are filing 250 or more information returns for a given tax year.

7. Small 1099 errors to avoid

The following is a list of small errors to avoid while filing your first or corrected 1099 form:

Modifying or damaging (e.g., staple, tears) the printed form’s length or shape: Submit the entire form as provided by the IRS.

Filing more than once: The IRS requires you to send one 1099 form and one 1096 form per return. Unless you are correcting a form, you don’t need to re-send these forms.

Entering wrong information or using the incorrect format: Fill your form’s boxes based on what the IRS asks. You should also follow their number format recommendation—using decimals to show cents and dollars (e.g., 11111.00 to represent $11,111).

Sending the IRS any form other than Copy A: The IRS doesn’t require you to send copies 1, 2, and B.

Using a copy, old version, or modified substitute version of the 1099 form: You should send the updated 1099 form provided on the IRS website unless you report prior year information. Otherwise, the IRS can penalize you for using improper formats.

Filing a name, TIN, and address for your 1099 form that differs from your 1096 form’s information: The 1099 and 1096 should have the same information.

Avoid 1099-NEC Penalties With Pilot

Want to avoid these common 1099 errors? Pilot prepares perfect 1099-NEC forms from the get-go so that you don’t worry about picking the wrong format, form, or missing a deadline. You can speak with one of our experts today to learn how we help you stay fully compliant with little effort.

12 Tricky but Common 1099 Errors That Lead to a Penalty