How to Avoid IRS Penalties When Filing 1099s and 1042s for Your Business

Penalties and fines for filing 1099s and 1042s incorrectly can be crushing, depending on your error and how long it took to correct it. But it is especially dangerous when you pay a lot of athletes, prize winners, contractors, or other mass non-employees in a calendar year because the number of 1099s and 1042s pile up and become almost impossible to control manually.

If you’re working in the USA, you need to protect yourself by implementing a foolproof process of collecting, reporting, issuing, and filing these forms and by working with a payment provider that handles 1099 and 1042 compliance for you. In this article, we will explain IRS income codes, examine the intricacies of the 1099 and 1042 forms, and ultimately help you avoid IRS penalties by following simple rules.

Understanding 1099 and 1042 forms and their use cases 

The 1099 (domestic payments) and 1042 (international payments) are a series of forms businesses use to report all their non-employee payments to the Internal Revenue Service. 

The United States alone is expected to have over 90 million freelancers by 2028. So, you need a streamlined 1099 and 1042 filing process to handle all significant payments to these contractors, athletes, creators, prize winners, and others.  

As a business owner, you are responsible for:

• Collecting correct data and forms from payees (W-9 and W-8). 
• Preparing the 1099 and 1042 forms with the right income codes and the payee’s personal data.
• Remitting the tax withheld from any payments. 
• Filing with the IRS against deadlines and issuing all these forms to all the payees on time. 

What you need to know about the 1099 form series

Altogether, there are over 20 types of 1099 forms for reporting on things like corporate capital movements, investment dividends, and pensions. However, to handle most business cases in sports, esports, NIL, and creative fields, you’ll use forms 1099-NEC, 1099-MISC, and 1099-K.

• 1099-NEC – non-employee compensation (NEC) needs to be reported for payments over $600. These are payments to agencies, production companies, sports leagues, regular contractors and vendors, endorsements, creative freelancers, etc.
• 1099-MISC – royalties, prizes, rent, and other such payments fall under miscellaneous income. If you’re dealing with royalties, anything starting with $10 must be reported using 1099-MISC. For the rest of the cases, the standard $600 threshold applies.
• 1099-K – applies to third-party network transactions (e.g., payment processors). Currently, when the total gross payments using a payment processing platform to a payee exceed $5000, you need to file a 1099-K for them. This threshold is expected to drop to $600 in 2025.

To file any of the 1099s, you need the payee to accurately fill out the W-9 with their personal details. When you use the Payment Labs platform, these forms are prepared and handled automatically.

2025 filing deadlines for 1099-NEC, 1099-MISC, and 1099-K

• 1099-NEC - file 1099-NEC on or before January 31 to both payees and the IRS.
• 1099-MISC -  file 1099-MISC to the IRS by January 31 on paper or by March 31 electronically. Send the copies to the payees by February 28.
• 1099-K - your 1099-Ks are due to payees by January 31. And to the Internal Revenue Service by February 28 for paper filing and March 31 for electronic filing.  

For more information on working with non-employees, check out our 1099 compliance guide for work with athletes, agencies, and collectives. 

What you need to know about the 1042 form series:

The main form used to report payments you’ve made to non-employees abroad is 1042-S. 

To file 1042 series forms, your foreign contractors must provide you with a completed W-8 for countries where tax withholding applies. 

If you are paying to a country that doesn’t require tax withholding, you will still need to collect forms W-8BEN (for individuals) or W-8BEN-E (for entities) from payees.

Businesses file 1042s with the IRS in addition to paying the tax they withheld from the payments made to non-residents. The tax is usually 30%, depending on the state or if there’s a discounted tax treaty rate.

The 1042 series has three types of forms:

• 1042-S - used to notify the IRS about all payments made internationally. This generally includes compensation for services from foreign contractors, royalties, dividends, and payee interest payments to foreign entities, as well as prizes and awards. 
• 1042 - annual summary report, which includes the total amount of tax withheld from payments to international payees. 
• 1042-T - the 1042-T is used to bundle multiple forms in batches for easy reference when submitting 1042 on paper.

2025 Form 1042 filing deadlines:

The forms 1042, 1042-S, and 1042-T must be filed by March 15 every year.

Understanding IRS income codes

Both 1099 and 1042 series forms have their own set of income codes. These codes identify the nature of the payment or the type of income being reported. 

The IRS is one of the most efficient revenue collection systems in history. So, if you accidentally file the form under the wrong income code, it is very likely to get flagged after being cross-checked with the payee’s taxes and other data-matching mechanisms.  

Once the IRS finds a mistake, they contact you and request that you file corrected forms and pay any due penalties. You will find details about penalties later in the article. 

Of course, it’s best not to attract this kind of attention from the authorities, as repeated offenses and red flags can lead to audits. Reliably automating this process is extremely important when you work with various non-employee people and entities like sports rights holders, esports organizations, collectives managing student athletes (NIL), and talent agencies paying global content creators.

Relevant 1099 income codes:

There are dozens of 1099 income codes, most of them focusing on interest and dividends. But these are the ones you’re most likely to use working with the use cases we’re analyzing. 

• 12 – endorsements and copyright
• 16 – scholarship or fellowship grants
• 17 – independent personal service
• 18 – dependent personal service
• 20 – compensation during studying and training
• 23 – other income
• 28 – gambling winnings
• 06 – dividends paid by US corporations. 
• 42 – earnings as an artist or athlete (no central withholding)
• 43 – earnings as an artist or athlete (with central withholding)

Relevant 1042 income codes: 

1042 forms have their own set of 50 income codes covering all the international payment needs. These are the most used by our costumes most commonly:

• 17 – compensation for independent personal services
• 18 – compensation for dependent personal services
• 23 – other income
• 16 –  scholarship or fellowship grants
• 11 – film or television copyright royalties 
• 20 – capital gains distributions

Common mistakes and penalties for incorrect filing of 1099s and 1042s 

• Late filing – penalty from $60 to $330 per form and up to $3,783,000 per year, depending on when and whether you filled out your forms.
• Wrong TINs – if your 1099 forms have wrong taxpayer identification numbers (TIN) you receive the so-called B notices from IRS urging you to file corrections. If you fail to do so, the IRS charges penalties for each information return you fail to correctly file on time and each payee statement. Up to 30 days late – $60 each, 31 days late through August 1 – $130, after August 1 or not filed – $330, intentional disregard – $660.
• Failing to provide the payee with copies leads to the same penalties as late filing.
• Intentional disregard of forms 1099 and 1042 is subject to a minimum penalty of $660 per form, or 10% of the income reported on the form, with no maximum.
• Corrections of the wrong payment amount, wrong filing codes or missing required fields made 30+ days before the due date are usually free. Within 30 days of the due date, the penalty is $50 per form. Thirty days after the due date and until August 1st, the fines are $100 per form. 

Mastering forms 1099 and 1042

When you’re managing one-off payments to freelancers, contractors, and/or vendors, you may be able to make 1099s and 1042s manually. But this becomes overwhelming even at small volumes. Failure to comply with the IRS’ requirements leads to penalties that can break a business.  

That is why any business dealing with payments to non-employees needs a reliable payment processing solution in place that automatically creates the forms for both parties’ reporting and helps you make sure no reporting mistakes have been made. 

At Payment Labs, we specialize in automating payments and tax file management for sports rights holders, esports organizations, collectives managing student athletes (NIL), and talent agencies paying global content creators. We know how to scale cross-border and domestic payment processing for businesses like yours. Whether you’re in one of these industries or not, we have an intuitive solution to address your business's specific payment processing needs. 

Schedule an intro call with us to see how we can save your payees and you not just valuable time and money but headaches with reporting and filing your taxes.