What Happens if You Don’t File Your 1099 for Subcontractors?

Filing a 1099 form for subcontractors is a critical responsibility for businesses to comply with tax regulations. This document allows the IRS to track income paid to non-employees and ensures proper tax collection. Neglecting this obligation can result in serious consequences for both businesses and contractors.

Non-Filing Penalties

Failing to file a 1099 form can lead to financial penalties that escalate based on the delay. The IRS employs a tiered penalty system to promote timely compliance. Filing within 30 days of the due date incurs a $50 penalty per form. After 30 days but before August 1, the penalty rises to $110 per form. Filing after August 1 results in a $290 penalty per form. For businesses with numerous subcontractors, these penalties can accumulate quickly.

If the IRS determines the failure to file was intentional, penalties increase to $580 per form with no maximum limit. These amounts are adjusted annually for inflation, potentially increasing over time.

Additional Taxes Owed

Not filing 1099 forms can result in additional tax liabilities. The IRS uses these forms to verify subcontractor income. Missing forms may raise suspicions of underreported income or worker misclassification, possibly leading to an audit. If discrepancies are discovered, businesses may owe unpaid employment taxes, including Social Security and Medicare taxes.

Misclassifying workers as independent contractors instead of employees can further increase tax liabilities. If the IRS reclassifies subcontractors as employees, businesses may face back taxes, interest, and penalties. Properly determining worker classification is crucial, considering factors like behavioral control, financial control, and the nature of the relationship.

Reporting Conflicts With the IRS

Reporting conflicts with the IRS often arise from discrepancies between income reported by subcontractors and the IRS’s records, typically caused by missing or incorrect 1099 forms. Such inconsistencies can trigger audits, requiring businesses to substantiate their reporting practices. If subcontractors report income differently than the forms submitted by the business, investigations can become prolonged.

Maintaining accurate records is key to reducing such conflicts. Businesses should ensure their accounting systems correctly track transactions and verify subcontractor information, such as Taxpayer Identification Numbers (TINs), before issuing payments. Proper documentation demonstrates due diligence and accurate reporting during IRS inquiries. Regular audits of financial records can help identify and resolve discrepancies, minimizing the risk of IRS conflicts.

State-Level Repercussions

State-level consequences for not filing 1099 forms can also be severe. Each state has its own tax laws and reporting requirements, which may differ from federal regulations. States like California and New York have strict mandates that often align with federal rules but include additional provisions. Businesses must understand these specific requirements to avoid state penalties.

Missing or incorrect forms can complicate state tax filings. Many states rely on 1099 forms to calculate income taxes and ensure proper revenue collection. Errors or omissions can lead to underreported state taxes, resulting in added assessments, interest, or audits by state authorities. States may impose their own penalties for late or inaccurate filings, increasing the financial burden on businesses.