MISTAKE #2: The 1099 Mismatch
Top Tax Return Mistakes Made By Self Preparers
With the advent of consumer-friendly tax software, it’s incredibly easy to prepare your own tax return. Many of my clients first reach out to me because they’ve been self-preparing and made an error that has resulted in an IRS notice or audit.
You’re self-employed, you have decent records, why wait to
file your tax return? The top mistake that self-employed individuals make when
preparing their own tax returns is that they don’t wait for all of their tax
forms. It is most common for new businesses in their first and second year,
because by the third year, the IRS notices about your mistakes drive you to
seek advice!
What is a 1099-NEC?
If you’re a sole-proprietor or a single-member LLC and
another business pays by cash or check more than $600 for work that you do,
they are supposed to send you a 1099-NEC reporting your compensation as an
independent contractor. With smaller businesses, it can be hit or miss as to
whether or not the 1099-NEC is ever filed. Sometimes they’re filed, but not
delivered to the independent contractor.
When an employer sends the 1099-NEC to you, it means that
the information has also been reported to the IRS. Which means that if you
report less income on your tax return than what the IRS has been told about,
it’s going to create a problem for you!
Many independent contractors ignore 1099-NECs. They figure they
have their own records for income and that’s all they need. They don’t bother
to double check to make sure their numbers match the employer’s numbers.
1099-NECs are supposed to be sent out by January 31, so
it’s best to wait to file until that date has passed, so you can be relatively
sure that you’ve got them all. If one comes late, after you’ve filed your
return, double check your tax return to confirm that you included that income.
If your employer says they aren’t sending you a 1099-NEC for your work, don’t panic. You don’t have to hunt them down for it. Just
report your income without it. Remember – you are obligated to report all of
the income you earned, even if a 1099-NEC is not filed.
What is a 1099-K?
It turns out that if your employer pays you through a
third-party processor – such as by credit card or Paypal or Venmo – your compensation is
not reportable on a 1099-NEC. Instead, you may receive a 1099-K from the
third-party processor. Starting January 1, 2022, these third party processors are required to send a 1099-K if the payments you received through them exceed $600.
The real trick with 1099-Ks is that they report your gross
receipts without subtracting all of the fees you paid! 1099-Ks are commonly
mismatched when the individual reports their net income (because that’s the
amount that got deposited into their bank account), instead of reporting the
gross income and then deducting fees as an expense.
So if you’re self-employed, make sure that you gather up all
of your 1099s, add them up, and then compare them to the gross receipts
reported in Line 1 of Schedule C. If Schedule C, Line 1 is equal to or greater
than the total of the 1099s, that’s good. If Schedule C, Line 1 is less than the
total of the 1099s, that’s bad!
Coming up next: Mistake #3 - Unreported Retirement Distributions
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