Here are a few tips to consider prior to preparing your clients’ 1099-NEC forms for the 2021-2022 tax year.
The life of a certified public accountant (CPA) during the filing season can be extremely chaotic. This is due to the sudden surge in the requests clients make to ensure that the records are up to date and accurate.
In a typical income tax return preparation, the transactional information helps the preparer figure the accurate net tax due for a tax year. This amount must be paid by the client (the taxpayer) to avoid notices and penalties from the IRS.
However, for Form 1099-NEC prep, figuring out the non-employee compensations paid in total, taxes withheld from payments to contractors, state tax withholdings, and of course, TINs (Taxpayer Identification Numbers) – all play a critical role.
Form 1099-NEC requires the taxpayers to figure and report the total non-employee compensations paid to independent contractors in the course of the business during a tax year. If the total amount paid to the independent contractor is at least $600 or more, then the same must be reported on the 1099-NEC form.
The following will discuss a few points CPAs must consider prior to 1099-NEC preparations.
Differentiate Non-Employee Payments From Miscellaneous Payments
Since Form 1099-NEC was reinstated to replace Box 7 of Form 1099-MISC, the IRS has made several changes to Form 1099-NEC and 1099-MISC. Check the updates here for Form 1099-NEC and here for Form 1099-MISC
CPAs must consider the point of differentiation for non-employee compensations, which must be reported only on Form 1099-NEC compared to miscellaneous payments, such as rent, royalties, and other payments, which must be reported on Form 1099-MISC.
Understand The Updated IRS Penalty Assessments
Inaccurate reports and delayed filings result in penalties. The IRS is only increasing the penalty charges in order to improve tax discipline in the voluntary compliance program. Each delayed 1099-NEC filing will cost you at least $50-$270 with no limit on the maximum penalty. This is due to the unique use cases of different business taxpayers.
As a licensed CPA, you must be aware of these penalty charges so that you can educate your clients about the repercussions of willful disregard towards IRS filings.
Avoid TIN Discrepancies With The IRS
While we’re looking at the pitfalls of inaccurate reporting, do not take incorrect TIN reports for granted. Each incorrect TIN will hit you back with a CP2100 and CP2100A notice(s) along with a $270 penalty for each incorrect TIN reported.
Useful Link – Guide to Handle CP2100 Notice Or B-Notice From The IRS
Incorrect TINs can also increase the risk of file rejections, which results in double the workload on accountants.
Track Withholdings And Payment Transactions
Encourage your clients to maintain a comprehensive record of all payments that have been processed and the collective of transactions that are pending. This will allow you to figure out the net non-employee compensations paid.
Further, the taxes withheld from the non-employee payments must be mapped with proof of the transaction records. In such a case, encourage your clients to keep a track of both payments and withholdings to avoid last-minute rush during the filing season.
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Pay Attention To State-Specific Reporting Requirements
Form 1099-NEC is now a part of the CF/SF program, which enables business taxpayers to report and file Form 1099-NEC in accordance with the state-specific reporting requirements. Take a look at this guide to check the state-specific 1099-NEC reporting information.
Choose eFile To Address 1099 Paper Filing Restrictions
Recently, the IRS announced that the 1099 paper filing volume has been reduced to 100 forms (collective form types), which makes it difficult for business taxpayers to file by mail.
Considering the new threshold restrictions, choose electronic filing from an IRS-authorized agent, such as Tax1099, which enables convenient tax reporting and regulatory compliance solutions, such as real-time TIN Matching, Address Validation, eFile Schedule, Bulk eFile, and more.
This means you can prepare more returns, validate more reports, and eFile in bulk– all within minutes.
