Beware Of the 1099 Late Filing Penalty (Plus How To Avoid It!)

8 Min Read

Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

The 1099 tax form is not a tax form in the traditional sense because it is not technically required by an individual to file their taxes. It is often referred to as an “Information Return”. Every business is required to file a 1099 to the Internal Revenue Service and provide a copy of the 1099 to the taxpayer so it can be used for income tax preparation.

While it is most often associated with businesses utilizing independent contractors there are numerous situations which may result in a 1099 being required. It is critical to provide appropriate 1099 forms to taxpayers and file them with the IRS in a timely manner. Failure to file in a timely manner can lead to significant penalties.

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What Are the 1099 Form Filing Deadlines?

While there are a lot of different types of 1099 forms, they are all considered "payee statements". There are two different 1099 form filing deadlines business owners need to be aware of. As with all IRS deadlines, the date will be moved to the next business day if the due date

Deadline for Providing 1099s to Recipients

The first deadline is when the 1099 must be provided to recipients. The due date is dependent on the type of 1099. The 1099 MISC (with data in boxes 8 or 10), 1099-B, and 1099-S must be provided to recipients by February 16th. All other 1099 forms must be provided by February 1st including any 1099 MISC which does not have data in boxes 8 or 10.

Deadline for Filing A Form 1099 with the IRS

The second due date for form 1099 is when it must be provided to the Internal Revenue Service. This due date will vary depending on if it is filed with the IRS via mail or if you file electronically. If you file on paper forms by mail there are two due dates. The 1099 NEC must be filed by January 31st and all other 1099 forms must be filed by February 28th. If you are filing electronically, the 1099-NEC due date is still on January 31st but all other form 1099s are due on February 28th.

Even if you do not receive an information return, you could still file taxes without a 1099.

Why Are the Due Dates so Early?

The due dates for information returns are earlier than most tax return paperwork because it allows the IRS to detect refund fraud more easily. The IRS recommends you e-file because it is not only the quickest option but also the most accurate.

What Are the State Filing Requirements?

Most new business owners assume that filing their form 1099 with the Internal Revenue Service will also cover any state specific requirements. While this may be true in many cases it is not universal.

There is a combined state/federal program for 1099-Series forms which many states take advantage of. This program allows you to file with the IRS and the information is then transmitted to the state. Currently, only 31 states fall into this category so it is always important to check your state requirements.

There are also 12 states which do not require the filing of a Form 1099-MISC and 6 states require a separate filing.

What Are the 1099 Late Filing Penalties?

There are two different types of 1099 late filing penalties based on when the 1099 is filed, if it is filed at all. These penalties assume the correct payee statement was filed and no corrections are needed.

1099 Late Filing Penalties If You File

A 1099 late filing penalty is a bit different than how a tax underpayment is calculated. The amount of the penalty is based on how late the filing is and how many 1099's are filed late and the size of your business. A "small business" is any business with gross receipts of $5 million or less. A large business is any business with more than $5 million in gross receipts during the tax year.

It is important to keep in mind the below penalties are based on tax year 2020 IRS regulations so the amounts may increase or decrease in the following tax years.

Less Than 30 Days Late

How many days after the due date were you late? The penalty for filing form 1099 less than 30 days late is $50 per form with a maximum penalty of $194,500 for small businesses and $556,500 for large businesses. If you are late, be sure to file within 30 days to avoid receiving a larger penalty.

31+ Days Late But Prior to August 1st

The penalty if you send in a form 1099 and file more than 30 days after the deadline but by August 1st is $110 per form with a maximum penalty of $556,500 for small businesses and $1,669,500 for large businesses.

After August 1st

If you file after August 1 the penalty is $270 per form with the maximum penalty of $1,113,00 0 for small businesses and $3,339,000 for large businesses.

What Happens For A Failure To File

If you do not file your required 1099s at all then the IRS may impose additional penalties than the $270 per statement. This situation will arise when the IRS determines the lack of filing is due to "intentional disregard". The Internal Revenue Service notes that intentional disregard can occur when you know or should know the filing requirements but intentionally ignored them.

There are 3 criteria which must be met for the IRS to prove the intentional disregard standard.

You were required to file a form 1099
You know or should have known a 1099 had to be filed
You ignored the duty to file the 1099 both correctly and timely

If the IRS believes all three criteria have been met, the penalty for not filing a 1099 is $550 per return and there is no cap on the total penalty amount.

1099 Penalties if You Do Not Provide a Timely Payee Statement

Along with filing the 1099 with the IRS, you must also provide the 1099 to the payee. The penalty for not providing a correct information return to the payee is the same as if it was not filed timely with the IRS. If it is determined you only provided partial information the penalty is $530 with no cap on the total penalty amount. Fortunately, there are no penalties for inconsequential errors.

What If You File a 1099 With Incorrect Information?

There are two different classifications of 1099 errors - Type 1 and Type 2. The correction method will be determined by what type of error it is.

What is a Type 1 Error and How Do You Provide A Correct Form?

A Type 1 error occurs when the following information is incorrect:

Incorrect amounts
Incorrect codes
Incorrect checkboxes are marked
Incorrect payee name
Incorrect payee address
When a form is filed but should not have been

Correcting a Type 1 error requires you to complete a 1099 with the correct information and check the "CORRECTED" checkbox on the 1099. Once the corrected form has been created, it must be sent to the recipient. A red Copy A must be sent to the IRS with Form 1096 if you file by paper. If you are e-filing, you do not need to send a Form 1096 and you do not need to include the originally filed forms. You only need to submit the new 1099.

What is a Type 2 Error and How Do You Correct It?

A Type 2 error occurs when the following information is incorrect:

Incorrect payer information (including incorrect TINs)
Incorrect payee information (including incorrect TINs)
The wrong form was prepared (1099-DIV instead of a 1099-INT)

Correcting a Type 2 error requires you to complete and file two form 1099s. The first will include the same payer and recipient information that was on the incorrect form. All of the amounts will be $0.00 and the "CORRECTED" box should be checked. Functionally, when this form is filed it will zero out the incorrect form information that was previously filed.

Once this has been completed, you will need file a new Form 1099 with the correct information. The filing process is the same as the Type 1 error. The corrected form will be sent to the recipient a red Copy A must be sent to the IRS. If you are e-filing Form 1096 is not needed but if you are filing by mail it is required.

When to Void a 1099

Voiding a 1099 is an option in some cases. Next to the "CORRECTED" checkbox there is a "VOID" checkbox. If you have mistakes on a completed 1099 and have not submitted it to the IRS, you can void it. You cannot void a 1099 if you have already filed it with the IRS.

Why Void a 1099

The primary benefit of voiding a 1099 is administrative. If you a completed or partially completed 1099 that is incorrect, voiding it provides you with a way to cancel out a single form that is on the same sheet of paper as other 1099 forms. This is a simple solution that can be used so that you don't have to redo/re-print all of the other 1099 forms.

Requesting a 1099 Extension

If you plan ahead, it is possible to request a 1099 extension however this must be done prior to the filing deadline. You cannot avoid 1099 late filing penalties by requesting an extension after the deadline. The method used to request the extension is based on what you need the extension for.

Requesting an Extension to Provide Recipient Copies

To request an extension related to providing 1099 copies to recipients you must send a letter to the IRS explaining why the extension is needed. Along with a reason for the extension you will also need to provide information about each recipient. The required information is available on the IRS website.

Requesting an Extension to File 1099s With the IRS

To request an extension to file your 1099s with the IRS you must complete and submit Form 8809. It must be postmarked prior to the filing deadline. This will provide an automatic 30 day extension. If an additional 30 days is needed and additional request may be filed but it will not automatically be granted.

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

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Benefits of written contracts

A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.

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