Dealing with Errors
What do you do when you discover an error on a 1099? Or perhaps you discover that you should have sent a 1099 to someone, and now the deadline has passed? This article will help you with the process and alleviate some of your concerns.
Types of Errors
Errors can come in many different varieties. Perhaps you transposed someone’s Social Security number, or put the wrong dollar amount on the form. The specific action you need to take when you discover an error varies, but the general action is – you file a corrected 1099 to fix the error.
Before we talk about errors, we need to discuss why we file 1099s to begin with. This is not as random as it sounds – understanding the “why” of filing helps us understand when to file corrections (because not every error necessarily needs to be corrected – you only need to correct the errors that have an impact on the “why” of filing).
Why We File
Why do we file 1099s? This gets lost in the shuffle for those of us who deal with this stuff every day. We spend so much time dealing with compliance and all the little details that we don’t think about why we do it.
So, why do we file 1099s? Many readers will say, “because the IRS tells us to.” Well, yes, though, to be pedantic, it’s not the “IRS”; it’s tax law.
And why does the law tell us we must? Why does the author ask so many rhetorical questions instead of just giving us the answer?!
Okay, your author says, enough of the questions. The answer is: tax compliance.
Whenever the law calls for you to issue a 1099, it’s (almost always) because you have paid something to another party, which is taxable to that other party. For example, you pay an independent contractor. They must report that payment as income. You report it on a 1099-NEC.
Note that we say “almost always” because once in a while, you’ll report something that might not be taxable to the recipient. The prime example is “gross proceeds paid to an attorney.”
But we are starting to digress. (Who is this “we” the author is talking about, you ask? You are correct, it’s your author who is digressing.)
There’s a lot more to it, of course. Some transactions are not reportable, but are still taxable to the recipient. Payments for supplies, for example. You do not issue a 1099 for purchasing supplies, yet the party that you buy the supplies from must report the transaction as income on their tax return. Same thing with the corporate exception to reporting. The corporation still must report that transaction as income, even if you don’t issue it a 1099.
But the point is, you have paid someone for something that the law says is reportable on a 1099 – they must report that payment as income. Form 1099 helps the IRS facilitate honesty in the tax system.
When you file 1099s with the IRS, they put that information into their databases. In other writings, we delve into “how” they catalogue the information, but here’s the short version. They use the first four characters of the last name or the first four significant letters of the business name, and then the TIN of that person or business.
Their computers then wait for the recipient of that 1099 to file their tax return. The computers are watching, making sure that the recipient reports the income from the 1099.
That’s a somewhat simplistic view of it, but that’s the basic overview — you file 1099s to help the IRS with tax compliance.
And that is why we file corrections when we spot errors. Or, sometimes we don’t file corrections. It depends on whether the error hinders the IRS’s computers from doing their jobs.
Penalties
Let’s take another diversion. Hooray, the reader says. I can hardly wait, the reader says.
Let’s talk about penalties. This is another situation where context helps us understand the issue: you file corrections when the IRS’s computers can’t do their watchdog job, and that’s when the IRS can penalize you.
Regulation 301.6721-1(a)(2)(ii) says the IRS can assess a penalty for “failure to include all the information required to be shown on the return or including incorrect information (failure to include correct information).”
This means that if you file on time but the form you file has incorrect information on it, you could be penalized.
But fear not – even if you made a mistake on a form you filed, there are ways to avoid penalties. In fact, with these two items here, you don’t even need to apply for penalty relief. You simply aren’t penalized. Those two items are:
1. Errors that you aren’t required to fix.
2. Errors you correct by August 1st.
No Correction Needed
There are a few errors that don’t need to be corrected. Among those are:
● Wrong first names.
● Wrong addresses.
● De minimus dollar amounts.
First Names, Addresses
The IRS doesn’t use first names or addresses of 1099s, so an error in one of these items doesn’t stop the IRS’s computers from doing their job as watchdog. If the last name and TIN are correct, those sneaky computers can lie in wait, waiting to pounce on a contractor who dares not report income from a 1099 they received.
Of course, if you discover that a first name is wrong or the address is wrong, you should fix it in your system – but you’re not required to file a correction with the IRS, and you aren’t penalized for such an error.
De Minimus Dollar Amounts
A de minimus dollar amount is one that is $100 or less, with all boxes except backup withholding. Backup withholding is a $25 de minimus threshold.
Example: you send a 1099-NEC to That Guy for contract labor. You paid him $3,000 this year. When you’re typing the information into your system, though, you accidentally type $3,003. This is a $3 error – far less than $100. This means you are not required to file a correction, and there is no penalty.
There is one important caveat on all of this, and that is: if your payee requests a corrected form, you must provide them with a corrected form and file it with the IRS. Your payee has a timeline – usually October 15th – to request a corrected form.
Same example as before, except That Guy requests that you send him a new 1099-NEC, showing $3,000 instead of $3,003. The regulations say you must comply with his request and provide him with a corrected form. You must also file this correction with the IRS.
The regulations lay out much more about how That Guy should request a corrected form and other specifics about all this, but this is sufficient for today.
Back to Errors
So, with that diversion to learn about “why” we file 1099s and how penalties can happen, let’s get back to errors. When we say “errors,” we mean errors for which you could be penalized. We just spent time going through those types of errors, and also the situations where penalties don’t apply.
So, with errors for which you could be penalized, you have two varieties: type 1 errors and type 2 errors.
Type 1
A type 1 error involves:
● Wrong dollar amounts (but see the discussion above about de minimus errors).
● Put the wrong code or checked the wrong box (for example, on Form 1099-R, you used the wrong distribution code).
● Issued a 1099 when you shouldn’t have.
Type 2
A type 2 error involves:
● Issues with TINs.
● Issues with last names or business names.
● Issued the wrong form (for example, you sent someone a 1099-MISC when you should have sent them a 1099-NEC).
Fixing a Type 1 Error
Type 1 errors require a one-step fix. That fix is, submit a corrected form and change whatever needs to be changed on it.
Example: Your 1099-NEC to That Guy shows $5,000, but the actual amount you paid him was $5,500. This is not a de minimus error (because the dollar difference is more than $100), so you must correct it. You will file a 1099-NEC with the “corrected” box checked, and showing $5,500 as the dollar amount.
Example: Your organization issues a 1099-R to That Guy for a retirement account distribution. The distribution code in box 7 of the original form showed a code of 2, but the correct code is code 1. You’ll file a 1099-R with the “corrected” box checked and the distribution code as code 1.
Fixing a Type 2 Error
A type 2 error requires two steps – canceling out the original form, and issuing a new form.
Example: That Guy’s SSN is XXX-XX-1234, but you accidentally typed it as “XXX-XXX-1243” on the 1099-NEC you issued to him. The fix involves filing two forms. One is a corrected 1099-NEC with the incorrect SSN and $0 for the amount. Then, you will issue a new 1099-NEC, using the correct SSN, and the correct dollar amount. You DO NOT mark “corrected” on this new SSN. The reason is, you’re not “correcting” this form … you’re issuing a form under that TIN for the first time this year.
How to File
Most of our readers file electronically. You must e-file the correction if you e-filed the original. And you must use the same system you used to e-file the original.
If you’re filing on paper, consult Publication 1099, which has the monumental title “General Instructions for Certain Information Returns (2025) (Forms 1096, 1097, 1098, 1099, 3921, 3922, 5498, and W-2G).”
A few notes on paper filing:
● You’ll need to include a Form 1096 with your mailing.
● If you paper-filed the original, you must paper-file the correction.
The Important August 1st Deadline
There’s an important date to know when it comes to filing corrections. If you file your correction by August 1st, and the number of corrections you’re filing is below the limits in the regulation (which we’ll define soon), you are not penalized at all for that error.
In the prior paragraph, we mentioned that the number of corrections you’re filing must be less than the threshold. That threshold is: the greater of 1) 10 forms, or .005 x the number of original forms you filed.
Example: your organization filed 15 forms this year. Your threshold under the correction rules is the greater of 10, or .005 x 15 = 0.075. Since we use the “greater of,” your threshold is 10. This means, you could have errors on up to 10 forms you filed, and if you file corrections by August 1st, you won’t be penalized at all.
Example: your organization filed 3,000 forms this year. Your threshold under the correction rules is the greater of 10, or .005 x 3,000 = 15. Since we use the “greater of,” your threshold is 15. This means, you could have errors on up to 15 forms you filed, and if you file corrections by August 1st, you won’t be penalized at all.
Note an oddity with this deadline. It is not July 31 – it is August 1.
If You Discover an Unfiled Form
Another scenario that often happens is, finding out after the deadline that you should have sent a 1099 to someone.
Example: it’s June 10, and your organization is trying to get its income tax return filed so everyone in the accounting department can have fun in the sun during the blissful summer months. As part of the process of pulling your records together, you discover that you should have sent a 1099-NEC to That Guy, and somehow you missed doing so. While the January 31 deadline has long since passed, you should send the 1099 right now.
Note that this situation would not be a correction, so your filing of an original form in June could be subject to penalties. Three thoughts on that:
1. Your presenter has had situations where clients of his filed 1099s as much as one year late (literally, it was one full year late) and were not penalized. This does not mean you “won’t” be penalized. When your author has brought this up to attendees, people will sometimes chime in saying “oh, I’ve been penalized for that.” Of course you “could” be penalized. But don’t be terrified of this thought. This brings us to point 2.
2. The penalties for 2025 forms filed in 2026 are: $60 if the form is 30 days late; $130 if filed more than 30 days late but by August 1st; $340 if filed after August 1st, or not filed at all. So if the IRS does decide to penalize you, it’s better to get it in “ASAP” as it can greatly limit the penalty amount. And then there’s item 3.
3. If the IRS thinks you intentionally disregarded the rules with your failure to file, the penalty is $680. This is why, even if it’s after August 1st, “just file it” is the best advice. If the IRS ever starts poking around, and they think you had a form you knew you should file and you chose not to, then you’re opening up intentional disregard.
The “Void” Box
Your presenter likes to give you factoids. So, let’s talk about the “void” box on 1099s. Someone recently asked your presenter if the void box can be used on e-filed 1099s. The answer is no. This is a box unique to paper filings.
Let’s delve a little deeper. To understand the void box, we need to think about the olden days, when people typed 1099s using a typewriter.
In those days, you would type on a sheet of paper that contained three or four 1099s for you to type into. This means that when you filed with the IRS, that sheet of paper would have three or four contractors listed on it. As you were typing, if you made a typo on a form, you’d scroll the paper back up, mark the “void” box, and then continue onto the next blank 1099 on that page.
When the IRS processed your paper filing, they would ignore anything with “void” marked.