Common 1099 Reporting Mistakes and How to Avoid Them

In Summary:

• Year-Round Documentation vs. Last-Minute Scrambling: Most reporting errors stem from inconsistent processes throughout the year. Waiting until January to collect W-9s or verify Taxpayer Identification Numbers (TINs) often leads to disorganized records, incomplete vendor information, and late filings that trigger IRS penalties.
• Common Misclassification and Payment Errors: Businesses frequently struggle with identifying reportable payments, such as incorrectly issuing forms for credit card transactions (which are handled by processors) or failing to report payments to incorporated attorneys and healthcare providers.
• Increased IRS Enforcement and Inaccurate Data: Poor data management, such as duplicate vendor records or unreconciled accounts, can lead to “B-Notices” (Name/TIN mismatches). With IRS penalties now reaching up to $680 per form for intentional disregard, proactive monthly or quarterly reviews are essential to ensure data accuracy and compliance with evolving tax laws.

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Mistakes on IRS Form 1099 are more common (and expensive) than many business owners expect. A single misclassification or missed dollar can trigger IRS penalties and audits. As 1099 requirements continue to evolve, it’s critical to understand where businesses most often go wrong and how to prevent misreporting errors before they arise.

Tracking and Filing Requirements

While final payment totals are not available until year-end, 1099 preparation and review should be a year-round process. Filing 1099 forms requires more than simply issuing them at year-end. Businesses need to track and document payments made to nonemployees throughout the year to determine which vendors and contractors meet reporting requirements and compile total payments for each recipient.

What Are the Most Common 1099 Reporting Mistakes?

Even with the best intentions, businesses can encounter pitfalls when preparing and filing 1099 forms.

Reporting mistakes can trigger substantial IRS penalties that can compound quickly for businesses with large vendor networks. Below are some of the most common reporting mistakes we see organizations encounter.

Last Minute Preparation

Most 1099 reporting errors stem from inconsistent processes throughout the year. Without monthly or quarterly 1099 practices, disorganized financial records, incomplete vendor information, and overlooked errors are not exposed until December and January, limiting the time and resources needed to resolve them. Come January, missing or unverified TINs and W-9s and incorrect tax information can almost guarantee late filing and the risk of penalties.

Misunderstanding Reportable Payments

Businesses often confuse which payments require 1099 reporting. Common errors include incorrectly issuing 1099-NECs for payments made with credit cards or through third-party processors (which the processor, not the business, generally reports). In addition, improper vendor setup or incorrect expense coding in the accounting system may cause businesses to overlook reportable payments made by check or ACH.

Vendor Misclassification

Without proper W-9 collection and vendor classification, businesses can inadvertently issue unnecessary 1099s or fail to report required payments. C and S corporations are commonly misclassified; although many are exempt from reporting, this exemption is subject to exceptions, such as:

• Payments of $600 or more to attorneys must be reported, even if the attorney operates as a corporation
• Payments of $600 or more to incorporated medical or healthcare service providers must be reported

Inaccurate Reporting

Poor data management and a lack of reconciliation can lead to inaccurate reporting, including duplicate or inconsistent vendor records and unreconciled accounts payable activity. This compromises reported totals, as they wouldn’t match actual payments. These issues can trigger IRS notices and penalties when combined with missed deadlines or insufficient documentation retention.

Failure to Address Tax Law Changes and IRS Enforcement

Although IRS regulations and 1099 form requirements are updated regularly, many businesses don’t review these changes before filing. Updates to filing thresholds and requirements can directly impact who must be reported and how forms are submitted.

The IRS has increased its enforcement efforts for information returns over the past several tax filing seasons. Businesses are experiencing a higher volume of Name/TIN mismatch alerts (B‑Notices), triggered when vendor information doesn’t match IRS records. Penalty tiers now reach up to $340 per form for late filings and $680 for intentional disregard.

Why Proactive 1099 Preparation Matters

Beyond regulatory considerations, year-round 1099 management provides operational clarity. Vendor onboarding, payment tracking, and periodic reviews each monitor cash flow and contractual obligations to help businesses understand their core operations. By implementing monthly and quarterly processes, companies can reduce year-end pressure and focus on strategic growth. If you have any questions or need assistance, please reach out to us using the form below, and we’ll be in touch.