If you are an independent contractor, information return filing is one of the most important aspects of your financial planning. The 1099 forms you fill out are meant to inform the government about your taxable payments.
As you would expect, completing the 1099 forms is subject to a number of rules. If your form is not filed correctly as per the laid down rules, you may face penalties as well as other reporting and financial issues. Here are some of the more common mistakes you should watch for when filing the form 1099 and when you calculate 1099 taxes.
1. Misunderstanding the Form
There are multiple types of form 1099s. Each type is meant to meet specific tax reporting requirements. You may receive the 1099-R for distributions from insurance contracts, IRAs, profit-sharing plans, retirement, annuities, pensions, etc. You could also get the 1099-S if you obtained sales proceeds following a real estate transaction.
Make sure you are using the right 1099. You should receive a 1099 from your client as long as they paid you at least $600 during the tax year in question. If you expect a 1099 but do not receive it by the deadline, contact the IRS and you may be issued with a substitute form or file your returns on time.
2. Failure to Write Off Business Expenses
As an independent contractor, you have a little more leeway in writing off business expenses.
For instance, a company may have an employee and a contractor working on a particular project. The employee will not get to write off commuting costs. The independent contractor, on the other hand, can write off commuting expenses as a business cost. The more business expenses you can write off, the more of your cash you can retain.
A failure to write off all qualifying expenses would mean unnecessarily paying hundreds or thousands of dollars in taxes.
3. Writing Off Personal Expenses
As a general rule, you cannot deduct personal expenses. However, for an independent contractor, the line between personal and business expenses is sometimes blurred.
For example, you may use your cellphone for both business and personal use, but you cannot write off the entire bill. Rather, you must prove that the line is predominantly for business – meaning more than 50 percent business use. For your vehicle and computer, you can only deduct what is exclusively used for business.
Because of the need to get this right, there is a risk of writing off personal expenses as business. Make sure you have solid record keeping to back up your claim.
4. Failure to Keep Accurate or Adequate Records
Deducting all relevant business expenses from your taxable income is only as good as the quality of records you keep to support your position. The IRS expects you to have business receipts that prove you incurred the expense in question.
This is one of the more exhausting parts of complying with your tax obligations. However, it is more than worth it if you consider the repercussions of not producing acceptable proof when it is demanded. The lack of an accurate or adequate record can lead to penalties and additional tax payments.
5. Late or Non-Payment of Taxes
Paying taxes is not really something the average person looks forward to doing. That money could always help bolster disposable income. The IRS knows this, so a failure or delay in paying your taxes can attract penalties.
The penalty for non-payment may be as high as 5% for every month of delayed payment, but it may not exceed 25% of the total due. For payments that are more than 60 days past due, the IRS assesses a $100 penalty. Penalties may also be levied for underpayment.
Knowing is Where It Begins
Adhering to the rules is crucial when completing 1099 forms. By knowing what are the most common mistakes around filling 1099 forms, you are more likely to get it right.