If you’ve earned money through an online platform or other source of income outside of a traditional employment arrangement, you will most likely receive Form 1099 in January of the following year. The earnings could come from a wide variety of sources: selling products, subcontracting or freelance work, renting your home or other property, or even just a relatively small side-hustle. A 1099 form includes the information provided on your W-9 (your name and Social Security Number or Employer Identification Number) and will also be filed with the IRS, reporting money paid to you by each business or selling platform with whom you’ve done business with over the course of the year.
But what happens when the 1099 you receive includes an error? If the dollar amount is incorrect, the information you provide on your tax return may conflict with the information held by the IRS. Significant differences can lead your taxable income to be far over- or under-stated.
What to do when you receive a 1099 with an error
Occasionally taxpayers receive a 1099 that has incorrect information, such as amount earned. For instance, you may have earned $10,000 in tax year 2021 from a single client, but that client reported $100,000 on the 1099. In the eyes of the IRS, you are now deemed as having received $100,000 and owing tax on that amount. First things first: Don’t ignore the incorrect 1099.
Act quickly to rectify any 1099 errors, ideally before the client has filed the 1099 with the IRS. Reach out to your client (or the third-party payment processing platform) first. You may be able to resolve the issue directly with the sender by providing accounting details. If you are able to resolve the issue with the client, ask for a letter stating that they erroneously issued a Form 1099, and reissued a 1099 with the correct amount. That way, if you run into a problem, you have the proper documentation to explain the discrepancy.
In most cases, however, it’s tough to catch an error before the sender completes the filing process. If you reach out to your client and learn that he or she has already filed, a corrected 1099 is in order. The original filer (your client or payment platform) will need to file the corrected 1099, simply by completing a new 1099 form and checking the “corrected” box. Note that the correction may take some time to settle in the IRS system, overriding the initial 1099.
In some cases, the 1099 sender may not be willing to work with you or be difficult to reach. In this scenario, there is no quick resolution. You’ll address the discrepancy on your tax return on line 21, or on a Schedule C. You will need to show the client reported an erroneous amount on your 1099 and attach a statement to explain the difference. In your statement, include the amount reported, the difference, and the correct amount. Unfortunately, a 1099 discrepancy puts you at higher risk of being audited, but your explanation may serve to reduce your audit risk.
How to avoid an incorrect 1099
Avoiding errors on your 1099 forms comes down to your back office processes and communication. If you’re working directly with clients, we recommend providing your client with a year-end statement they can reconcile with their books to avoid these situations altogether. If there is a discrepancy, it’s easier to catch and resolve before any forms are filed with the IRS.
A well-organized back office is critical here. It’s vital to properly document all income earned and its source throughout the year so that you can quickly pull reports, showing how much money you have earned from each client or platform. Cloud-based account apps can help to keep your income, expenses, and all other back-office moving parts organized and properly classified. Utilizing an accounting app will simplify tax time, helping resolve and prevent many issues (including incorrect 1099s).
You may receive more 1099 forms than ever for tax year 2022.
As of tax year 2022, anyone who makes over $600 on popular platforms such as Etsy, Uber, eBay, VRBO, and Airbnb will receive Form 1099-K. Money you’ve earned by renting out your property, providing rides, selling your art, or other activities has always been under reporting requirements. The 2022 change is to the reporting required of these payment platforms and online marketplaces.
While many see this new requirement as a shock, it’s important to note that you must prepare now. All income should be reported on your tax return, regardless of whether you have received a 1099. Think of a 1099 as a firm nudge to report your earnings and give the IRS an extra set of checks and balances. Make a plan to set aside money for taxes from all of your income.
Update: Congress has delayed the law requiring e-commerce platforms to report information on workers earning $600 or more, which was a part of The American Rescue Plan Act of 2021. This law has been pushed by one year, meaning platforms such as Airbnb, eBay, and Etsy will rely on the threshold of more than 200 transactions worth an aggregate above $20,000 for 2022 (not $600).
Need help resolving a 1099 error?
If you find yourself on the receiving or providing end of an incorrect 1099 and are unsure how to resolve the issue, our team is here to assist. We can help you resolve the issues with your clients or provide a clear explanation of the situation on your tax return. For those business owners providing 1099s, we also offer year-round accounting services to create a seamless tax season. Send us a message to schedule a consultation with an experienced CPA.