Saturday, January 30, 2016

MISTAKE #2: The 1099 Mismatch

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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Sunday, January 24, 2016

Top Tax Return Mistakes Part 1

MISTAKE #1: Completing a Paper Tax Return by Hand

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. Our blog series about top tax return mistakes made by self preparers addresses these mistakes in turn.

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There are still a lot of people out there who just don’t see the need to pay for tax software or an accountant. So they prepare their own tax returns, by hand, with a pencil and a calculator, and submit the return to the IRS. The IRS frequently issues a list of “Top Tax Return Mistakes,” and all but one of them could be avoided by using a tax software package and E-filing the tax return. Let’s take a look at a recent list from the IRS.

1. Wrong or missing Social Security Numbers; wrong or missing names.

These are errors that are automatically detected when trying to E-file. The IRS will reject the return, and you can easily go back into the program and fix the mistake and E-file again, without any delay to processing your return.

2. Math mistakes and errors in calculating credits or deductions.

Tax software programs automate these calculations and take human error out of the equation.

3. Forms not signed or dated.

Your electronic signature is recorded when E-filing and your tax return is dated by the E-filing system.

4. Filing status errors.

Most tax software will walk you through the process of choosing your filing status so that you end up with the correct one.

5. Wrong bank account numbers.

Well, in this case, tax software is no help! Don’t write the wrong bank account number on your return. That said, if you do, take heart – the bank will usually detect the error when your name and bank account number don’t match their records and the deposit will be rejected. The IRS will then send you a paper check, which delays your refund and causes some unneeded stress when your tax refund doesn’t arrive when it’s supposed to.

So put the calculator and eraser down and turn on your computer. Many tax software companies offer free filing for the simplest federal returns, and for those with more complicated situations, it is well worth the price to be able to use a well-designed software package that helps you avoid common errors. Not comfortable with using a computer to prepare your tax return? Think about hiring a qualified tax preparer to do your taxes this year.

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