If a business utilizes the services of subcontractors, whether it’s on a regular basis or only occasionally, it is the company’s responsibility to provide each subcontractor with a 1099 form if more than $600 in any tax year is earned. This form enables the IRS to be aware of how much each subcontractor has earned, so they can ensure that the subcontractor reports this income when they file their taxes each year. This income is taxable, and while the business is not required to pay any taxes pertaining to this type of income, a contractor must.
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What is the 1099 Form?
The 1099 form is one of several types of tax forms that subcontractors must file with their taxes on an annual basis. Even if a subcontractor fails to receive a 1099 form from a business and there has been more than $600 in earnings, then the subcontractor must still report the income in their taxes. However, a business that utilizes services from the contractor may face certain consequences for failing to provide the subcontractor with a 1099 form.
The specific 1099 form that a contractor or subcontractor would receive is a 1099-misc form. The 1099-misc form covers a great number of different types of earnings in addition to contracting work, including lottery winnings, crop insurance proceeds, medical and healthcare payments, payments to an attorney, and much more. For a full list of the types of income that must be reported on the 1099-Misc, you can visit the IRS website.
What Consequences Can a Business Face for Failing to File a 1099 Form?
Businesses that fail to provide 1099 forms to the subcontractor who has provided services for them can be fined up to $250 per event. So, if a business utilizes services from multiple subcontractors and fails to provide the required 1099 form to them, then the $250 fees could add up fast.
If the IRS feels that a business was trying to be deceitful or that they purposely failed to report the 1099 form and send a copy to the subcontractors, then the IRS may more than double the penalty, increasing it to $550, which will add up even faster if there are multiple occurrences.
Paying Contractors unreported cash
Sometimes, a company will try to make things easier for themselves by paying subcontractors “under the table.” “Under the table” means that the business pays the subcontractors cash money that isn’t reported to the IRS. However, this is against the law, and if the IRS somehow finds out about these unreported funds, then both the business as well as the subcontractor could face penalties.
Why Would a Business Fail to Provide or Report a 1099 Form?
Running a business can sometimes be pretty hectic, and it can also be a huge responsibility. There could be any number of reasons why a business would choose to pay a contractor for a job and then fail to report it on a 1099 form. First of all, it could be a major hassle to complete these forms, especially for smaller businesses who may not have all the financial staff that larger organizations likely have.
Another reason why a business might fail to provide 1099 forms to the contractors that they’ve employed is that time simply got away from them. It’s not like businesses have to pay taxes for contractors like they do for employees, so there are no tax or financial benefits for them to pay someone “under the table.”
Regardless of why an employer fails to report 1099 forms as well as send one to their contractors, it is important for them to know that they will likely be penalized by the IRS if the income is discovered. For businesses who think that they can hide such actions from the IRS, they might receive an unexpected letter in the mail from the IRS, after the government has discovered what’s been going on.
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How Can Contractors Avoid a Penalty if a Business Fails to Provide a 1099?
Contractors are expected to keep track of all their earnings at all times, and as long as a contractor reports the earnings on their income tax return, the contractor will not be penalized. Again, it is businesses’ responsibility to report the 1099 to the IRS as well as send all contractors copies of these tax forms by January 31st of each year.
However, if a contractor fails to report the income that was earned despite failing to receive a 1099 form, then not only will the business be penalized, but so will the contractor. The contractor is required to pay taxes on all earnings, which is why he or she cannot get away with not reporting income, even if a business is at fault.
As you can see, it’s extremely important for businesses to file 1099 forms for all the non-employee workers that earn more than $600 in any tax year. They must report it to the IRS as well as send all contractors copies of their 1099s by the end of January each year. If a business does not provide the 1099, then the IRS could require that the business pay certain penalties which have the potential to add up fast. If you’re not sure how to do this, consider using a tax form management service.