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The 1099-NEC filing deadline has just passed. If you own a business and you hire contractors to work for you, have you had difficulty obtaining their tax ID to complete this filing?

You hired this very capable independent contractor. Treated him well, paying him good rates because he has done good work for you. As you approach this 1099 season, you reached out to ask for a W9 and suddenly he disappeared.

You are upset about the situation, and you are stuck. You paid this guy 20k last year and now your accountant is telling you if you can’t get a W9 from him, you need to remove this 20k from your business expense or you will have to pay a penalty.

You wonder should you just (A) claim the expense regardless? Or (B) not deduct this expense at all? Here are your options:

Option 1: You still file 1099-NEC, replace the tax ID with “refused” or “refused to provide”. If you choose this route, you may receive a letter from IRS telling you to make 3 more attempts (usually the timeframe is within 2 years). After that, you will need to start backup withholding of 24%. Example, if you pay this person $15 per hour, 24% of $15 is $3.60. You need to remit this $3.6 to the IRS via EFTPS, which means this contractor should now receive $11.4 and no longer $15. Form 945 will need to be filed and submitted to IRS by Jan 31 of following year to report amount of backup withholding to IRS.

Sometimes, you may get lucky. If you happen to retrieve the tax ID, you can file corrected 1099-NEC to replace the refused copy with the correct EIN or SSN.

Option 2: Do not claim the expenses, which personally, I do not think is a good idea because business expenses are important to offset your taxable income and ethically, I believe everyone, including your contractors have their fair share of responsibility to fulfil their tax obligations.

The reality is that many business owners hire illegal workers (common in construction industry) and they are used to not filing these 1099s in the past. With the 80B funding, as a CPA, I am very concerned for business owners who still believe that they can get away from not filing 1099 or remitting backup withholding.

In Conclusion, if you want to run a successful business, STAY IN COMPLIANCE! Get it right from day one! Do what is right, protect your business! You may make certain mistake in your business, and you learn from it BUT when it comes to IRS, mistake in compliance is one that could destroy your business overnight. Omission in filing 1099s timely may result in penalties, even heavier penalties for intentional disregard.

So, if you are watching this video or reading this article, and you are troubled, you feel that you need some guidance, particularly the right guidance, please reach out. We would love to help you get on the right track.


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