What Penalties Will a Company Face for Not Filing 1099s to Subcontractors?
If you pay a contractor at least $600 to perform services for your business, you must file a 1099 form with the Internal Revenue Service. If you fail to file this form, the penalties can be harsh. The penalties for larger corporations are harsher than those for small businesses, but, given the size differential, the penalty impact on small companies could be significant. The best way to avoid penalties is to file correct 1099s by the applicable dates.
Companies must mail out all 1099s, including 1099-MISC, by January 31 following the end of the calendar tax year. The lone exception is Form 1099-C, which companies must send by February 15. Companies must file 1099s with the IRS by February 28 if filing by paper. If a company files electronically, then it must e-file the 1099 with the IRS by March 31.
The IRS levies penalties for a number of infractions related to the 1099. A penalty applies if your company fails to file on a timely basis. If your company fails to include all the required information or includes incorrect information on the 1099, you may be subject to a penalty. If you neglect to report a tax identification number, you file for an incorrect tax identification number or your paper forms are not machine readable, you may be subject to a penalty.
The IRS bases the amount of any penalty assessed on when a company finally files the correct 1099. If your company files within 30 days of the due date, then the penalty is $30 per incorrect 1099. The maximum penalty for small businesses for this violation is $75,000 per year. If your company files after 30 days but by August 1, then the penalty is $60 and the maximum penalty is $200,000 per year. If you file after August 1 or do not file at all, the penalty is $100 per 1099 with a maximum penalty of $500,000.
In general, a minor error or omission does not stop the IRS from processing a 1099. Therefore, the IRS does not consider a minor error or omission as a failure to include correct information. If a company operates responsibly and tried to avoid the failure, then a company can claim it acted in good faith and thus avoid penalties. With regard to maximum penalties, the IRS considers your company a small business if you generated $5 million or less in average annual revenues for the preceding three tax years.