Form 1096: What You Need to Know

Wondering exactly what Form 1096 is and if you need to prepare one? The most common reason to prepare Form 1096 is if your organization paid an independent contractor more than $600 during a calendar year. If so, then yes, you’ll need to prepare Form 1096 as a cover sheet for all the 1099-NEC forms you’ve prepared. Form 1096 can also be used as a cover sheet for several other IRS forms, so it’s important to understand the requirements.

In this article, I’ll walk you through how Form 1096 is used, how to complete it, and the potential consequences for completing it late or incorrectly. I’ll also outline several strategies you can use to ease the administrative burden of managing IRS tax compliance, such as partnering with an Employer of Record or payroll service, or working with a US tax professional or financial advisor. 

What is Form 1096?

Form 1096, officially known as the Annual Summary and Transmittal of U.S. Information Returns, is a crucial document used by businesses in the United States. It’s an accumulation report that effectively summarizes the information returns that a business is submitting to the Internal Revenue Service (IRS).

These information returns can cover a wide range of forms, including 1099-MISC, 1099-NEC, and more, which all report different types of income other than wages, salaries, and tips.

Form 1096 is submitted alongside copies of any information returns (such as 1099 forms or others) and aids in the IRS's monitoring and verification of declared incomes.

Other IRS forms that use Form 1096 as a cover sheet include: Form 1097, Form 1098, Form 3921, Form 3922, Form 5498, Form, 8935, and Form W-2G. 

Who Needs to File Form 1096?

IRS Form 1096 is primarily used by entities that pay non-wage compensation to non-employees or make certain types of payments to establishments or individuals through miscellaneous forms. It’s designed to report and summarize these transactions to the IRS. 

The most common entities that use Form 1096 are businesses, corporations, nonprofits, and other organizations that would have used the services of independent contractors or freelancers, or made payments entailing royalties, rent, or other sorts of financial gains to recipients.

However, it is important to specify that Form 1096 is not required for entities transmitting their reports electronically, as the form acts as a summary for paper forms being sent. 

In addition, companies that use payroll software that automatically sends this sort of information to the IRS might not need to file the form. Thus, its requirement predominantly focuses on businesses and organizations submitting non-electronic, non-employee compensation records to the IRS.

Remote Workers and Tax Reporting

Businesses with remote workers have an obligation to report specific types of payments to the IRS using Form 1096. This includes non-employee compensation paid to independent contractors and freelancers, which is often the case in remote work arrangements. 

Form 1096 serves as a summary of smaller forms like the 1099-MISC form, which are individually issued to each non-employee. It's required for any business that has made certain types of payments totaling above a certain amount throughout the tax year.

However, tax reporting for remote workers may be complicated depending on the workers' residential status. If a remote worker lives in a different state or even a different country, businesses may need to consider additional local taxes and reporting requirements. 

Other Tax Considerations for Remote Employees

As a remote employee, the way tax laws apply to you can be different from employees in a traditional office setting. With remote work, you might be providing services in one state while your employer is based in another. This could potentially mean you're liable for taxes in both states. To ensure you’re withholding taxes for your remote workers correctly, it's vital to consult with a tax advisor to clarify your tax liabilities in different states.

Additionally, you should also account for the potential impacts of working from home for tax deductions. Certain expenses incurred because of your employment could be deducted from your tax returns; however, the eligibility criteria and conditions vary. 

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How to Complete and File Form 1096

To complete Form 1096, compile all relevant 1099 forms from the tax year. Enter your company's name, address, contact information, and employer identification number in the appropriate fields. Then, note the total number of forms you're submitting, the sum of the reported payments, and the type of form you're transmitting.

Submit Form 1096 through traditional mail to the IRS. It should accompany the relevant 1099s. Note, that you cannot file this form electronically. Check the IRS website for the correct mailing address, which changes depending on your state.

Step-by-Step Guide 

If you’d like a bit more help, follow this 10-step process to complete and submit your Form 1096 correctly:

1. Compile the required information to fill out Form 1096:
   1. Organization’s name, address, and contact information (phone number, fax number, email, etc.)
   2. Taxpayer Identification Number (TIN)
   3. Employer Identification Number (EIN) or Social Security number (SSN)
   4. The total number of forms you’re submitting with your 1096
   5. Copies of all the accompanying IRS form 1099s you’ll need to submit. You will also need to calculate the following from these forms:
      1. The combined total of withheld federal income tax (Box 4)
      2. The combined total of reported payments (Box 5)
2. Enter details into the form according to the form instructions. Once completed, cross-verify all the information you’ve entered to avoid any unintentional mistakes. (Remember that any mistakes could lead to potential penalties from the IRS.) 
3. Enter your EIN into Box 1. Or, if you don’t have an EIN, you can enter your SSN into Box 2 instead. 
4. In Box 3, enter the total number of forms you plan to submit to the IRS. 
5. In Box 4, enter the total combined withheld federal income tax from all the forms you’re filing. 
6. In Box 5, enter the total combined amount of reported payments from all the forms you’re filing.
7. In Box 6, enter an X to indicate the type of form you’re filing. (Note: You can only select one type of form here. If you need to submit multiple versions of form 1099, you’ll have to send a separate 1096 form for each version.)
8. Print the 1096 form and all related 1099 forms, and a cover sheet that summarizes all of the documents you’re submitting. 
9. Make copies of all documents for your business records.
10. Mail the combined package to the IRS. 

Potential Consequences of Non-Compliance

Failure to meet the submission requirements for Form 1096 can lead to several negative consequences for businesses. Non-compliance can occur in various forms, including failing to file, incorrect filing, late filing, or filing incomplete forms. 

In addition to facing potential fines or penalties, non-compliance can also have other negative impacts on businesses, including increased scrutiny from government agencies, an increased risk of a financial audit, negative impacts on a business's reputation and creditworthiness, legal actions, and increased administrative burdens.

Form 1096 Filing Deadline

The deadline to file Form 1096 is February 28 each year. 

However, as of 2023, employers that need to submit more than 10 information returns (i.e., Form 1099s or others) are required to file electronically. For organizations where e-filing is required, submitting Form 1096 is not required.

If either deadline falls on a weekend or public holiday, the deadline shifts to the next business day. The IRS website is a useful resource for updates associated with Form 1096 filing deadlines.

Penalties for Late or Incorrect Filings

The IRS typically increases their penalty amounts for each new calendar year, so it’s important to always refer to up-to-date information regarding penalties on the IRS website. However, as of 2024, the penalties for failing to file a correct information return on time, or failing to provide correct payee statements are as follows:

• $60 per return if filed up to 30 days late
• $120 per return if filed more than 30 days late but before August 1
• $310 per return if filed after August 1 or not filed at all
• $630 per return in cases of intentional disregard of filing requirements

In addition to these penalties, the IRS also charges interest on penalties. The date that they begin charging interest varies according to the penalty type and amount. There is no maximum penalty in cases of intentional disregard. 

How to Avoid Common Mistakes

Here are the most common mistakes people make when filling out IRS Form 1096, as well as tips on how to avoid them:

• Using the Incorrect Form for the Year: Tax forms, including Form 1096, are updated regularly by the IRS. Using an outdated form can lead to compliance issues. Always order the most recent version directly from the IRS website to ensure compliance​.
• Inaccurate Identification Details: It's crucial to ensure all identification details for both the filer and recipients match official records to prevent miscommunication or processing delays. This includes names and Employer Identification Numbers (EINs)​.
• Calculation and Totals Errors: Double-check all calculations for accuracy, especially the totals reported on Form 1096, which should match the cumulative amounts from the individual 1099 forms. Inaccurate totals can lead to discrepancies and processing issues​​.
• Omitting the Federal Income Tax Withheld: If applicable, accurately report the total federal income tax withheld from all accompanying forms. This is a common area for miscalculations, so it's wise to cross-reference your figures​​.
• Failing to Submit a Separate Form 1096 for Each Type of Information Return: If you're filing multiple types of information returns (e.g., Form 1099-MISC and Form 1099-NEC), you need a separate Form 1096 for each type​​.
• Misunderstanding the Purpose of Form 1096: Remember that Form 1096 is a cover sheet for paper submissions of information returns to the IRS and not a form for reporting financial transactions. 
• Incorrect E-Filing with Form 1096: When e-filing returns, Form 1096 is not required. This form is only for paper submissions. If you're e-filing, focus on the individual information returns instead​.
• Not Keeping Copies for Your Records: Always retain a copy of Form 1096 and all information returns submitted to the IRS. Having these documents can be invaluable if discrepancies arise in the future​​.
• Missing the Due Date: Since the due date is always the last day of February, set a recurring reminder in your work calendar for early February so you ensure you’ll have enough time to gather all the information you need and process it well before this date.

Rely on Specialists for Peace of Mind

Now that you have a better understanding of Form 1096, how to prepare it, and the consequences of preparing it incorrectly, you may be wondering how you can make this process easier for your organization going forward. 

If you don’t have enough resources to manage these ongoing compliance requirements in-house, I recommend partnering with a third-party service provider to manage your tax preparation processes. Here are several types of services that can help with these matters:

Consult a Tax Professional 

A certified public accountant (CPA) or a tax attorney can provide expert advice on tax laws, helping organizations to correctly fill out Form 1096 and other tax forms. They can also offer strategies for tax optimization and assist in case of audits.

Work with an Employer of Record Service

For businesses that employ international workers or independent contractors, an EOR service can manage payroll, taxes, and compliance with local regulations in the employees' countries. This includes handling Form 1096 within the US, or equivalent forms in foreign countries according to international tax laws.

Engage a Payroll Service Provider

Full-service payroll providers specialize in managing payroll processing, tax withholdings, and filings for businesses. They’re a popular option among small business owners because payroll services manage all aspects of payroll processing, including tax filings like Form 1096 and others, tax credits, ongoing compliance, and more.

Use Advanced Tax Software

For organizations preferring a more hands-on approach but with professional guidance, business tax software can be a valuable tool. These solutions often include features that guide users through the process of preparing and filing taxes, including Form 1096, and provide updates on changing tax laws.

Work with a Financial Advisor

While primarily focused on broader financial strategies, some financial advisors also offer tax planning services. They can work with your tax professional or payroll service provider to ensure that your tax strategies align with your overall financial goals.

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