The Taxpayer Times

"Clear tax guidance for everyday taxpayers"

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Tax questions rarely arise in isolation. They tend to surface unexpectedly, in the middle of real-life situations, and the answers are often harder to find than they should be. This blog aims to explain tax topics that are often misunderstood or overlooked. Many areas of tax law feel confusing not because they are inherently complex, but because they are not always explained in a clear, practical way. The purpose of The Taxpayer Times is to break those topics down so readers can understand what applies to them and feel informed rather than overwhelmed by the law.

  • 1099-NEC or 1099-MISC? Don’t File the Wrong 1099

    When Old Habits Create New Problems

    Every January, when the 1099 filing season approaches, I see business owners scramble to figure out which forms they need to file. Some know the rules well; others are convinced all 1099s are interchangeable. Even though the IRS introduced Form 1099-NEC back in 2020, many businesses still file the wrong form simply because they’ve been using 1099-MISC for decades.

    Earlier this year, one of my clients – a consultant – brought me a 1099-MISC she received from her client. Her payer issued the wrong form entirely; consulting income should be reported on 1099-NEC, not 1099-MISC. When she told me, “They’ve always sent me a 1099-MISC,” I knew exactly what had happened. The payer never updated their procedures after the IRS changed the rules years ago. And she’s far from the only one facing this confusion. Long-standing habits are difficult to break, and outdated filing routines can quickly lead to mismatched income reporting and unnecessary IRS letters.

    Understanding the distinction between 1099-NEC and 1099-MISC is essential not only for accuracy but also for avoiding avoidable penalties and corrections later. Once you grasp the purpose behind each form, the January filing season becomes significantly less stressful.

    1099-NEC: The Form for Paying People Who Perform Work

    For many years, businesses reported payments to contractors in Box 7 of Form 1099-MISC. That worked until it didn’t. Different parts of the 1099-MISC form had different deadlines, which created delays and made it difficult for the IRS to match contractor income quickly. To fix this, the IRS gave nonemployee compensation its own dedicated form: Form 1099-NEC.

    Despite its introduction several years ago, businesses continue to misuse 1099-MISC for reporting contractor payments simply because that’s what they did for decades. But 1099-NEC now has a clear purpose: to report payments for services performed by nonemployees.

    If you paid $600 or more for labor or services performed by someone who is not your employee – such as consultants, freelancers, website designers, bookkeepers, technicians, or service providers – it belongs on 1099-NEC.

    A key point many filers misunderstand is that it doesn’t matter what the worker calls themselves. Whether someone considers themselves a freelancer, contractor, consultant, or “just helping out,” what matters is what you paid them for. If you paid for services, and the amount meets the threshold, the payment must be reported on 1099-NEC.

    The 1099-NEC deadline is firm: businesses must furnish the form to recipients and file with the IRS by January 31, 2026. And unlike most other 1099s, 1099-NEC does not qualify for the automatic 30-day extension. You can still request an extension using Form 8809, but the IRS grants extensions for this form only under specific hardship circumstances, such as severe illness, natural disasters, or other qualifying events.

    Most filing mistakes involving 1099-NEC come down to habit. Businesses continue to use 1099-MISC out of familiarity, not realizing the IRS changed the rules several years ago. But filing the wrong form can create a mismatch between what the payer reports and what the contractor reports, and that mismatch is what triggers IRS notices.

    1099-MISC: The Form for Non-Service-Related Business Payments

    Because contractor payments moved to Form 1099-NEC, many business owners assume 1099-MISC is obsolete, but it’s actually still one of the most widely used information returns. The difference is that 1099-MISC now captures a different category of payments: those not related to services.

    Think of the 1099-MISC form as covering financial transactions that support your business but don’t involve labor.

    For example, if your business pays rent for office space or storage, those payments belong on 1099-MISC, not 1099-NEC. Royalties – such as payments to authors, inventors, or owners of mineral rights – also belong here. Medical and healthcare payments, another category many people overlook, must also be reported on the 1099-MISC form.

    Attorney payments are another common source of confusion. Payments for legal services belong on 1099-NEC. But payments of gross proceeds (such as settlements) belong on 1099-MISC – one of those quirks that makes this form deceptively complex.

    Understanding this form is easier when you focus on its purpose. 1099-MISC is used for business-related payments that are not compensation for services.

    Because these payments differ in nature from contractor fees, the IRS gives businesses more time to file. While the form must be furnished to recipients by January 31, the IRS deadline for electronic filing is March 31, 2026. And unlike 1099-NEC, 1099-MISC does qualify for the automatic 30-day extension when Form 8809 is submitted on time.

    Many filing errors I see involve businesses incorrectly swapping the forms – paying rent but filing 1099-NEC, or paying contractors but filing 1099-MISC. These errors cause preventable IRS mismatches, and they can be avoided simply by understanding that 1099-NEC reports work, while 1099-MISC reports various other business payments.

    Where 1099-K Fits In and Why It Creates Confusion

    Although this article focuses on 1099-NEC and 1099-MISC, no discussion about 1099s feels complete without addressing the form that causes the most widespread misunderstanding: Form 1099-K.

    Each year, headlines and social media posts claim that payment apps like PayPal, Venmo, or Cash App will issue 1099-K if you have a transaction over $600. That is not how the rule works. As of now, for the 2025 tax year, payment platforms are required to issue Form 1099-K only when total business payments exceed $20,000, and the number of transactions exceeds 200. The reporting requirement is based on aggregate annual activity, not the amount of any single transaction.

    In other words, receiving more than $600 in payments does not automatically trigger a 1099-K. The form is issued only when both thresholds are met, and only for business-related payments processed through third-party platforms such as PayPal, Venmo, Square, Stripe, Etsy, or eBay. Personal payments – including gifts, reimbursements, or transfers between friends and family – are not reported.

    Zelle continues to operate under a different structure and does not issue 1099-K forms at all.

    Understanding this distinction is important. Confusing “more than $600 total payments” with “any $600 transaction” leads taxpayers to worry about forms they are unlikely to receive and distracts from the filings that actually matter during tax season.

    Other 1099 Forms Most Taxpayers Encounter

    Most individuals recognize forms like 1099-DIV, 1099-INT, and 1099-B, which report dividends, interest, and brokerage activity. These arrive consistently for anyone with investment accounts.

    Other forms appear less frequently but can have significant tax consequences:

    • 1099-S reports the sale of real estate.
    • 1099-C reports canceled or forgiven debt – something many taxpayers never expect to receive.

    These forms can surprise people, which is why understanding the broader landscape of 1099 reporting matters, even if the 1099-NEC vs. 1099-MISC distinction is the central issue for most small businesses.

    Keeping It Straight Without Memorizing Everything

    The key to understanding 1099s is not memorizing form numbers. It’s recognizing the purpose behind each one:

    • 1099-NEC → payments for services performed.
    • 1099-MISC → non-service business payments, like rent, royalties, and certain legal proceeds.
    • 1099-K → third-party payment platform transactions meeting specific thresholds.
    • 1099-DIV / 1099-INT / 1099-B → investment income.
    • 1099-S / 1099-C → real estate sales or debt cancellation.

    Once you understand the “why,” everything else becomes easier.

    Final Thoughts

    If this is your first time navigating the differences between 1099-NEC and 1099-MISC, you’re not alone. Even seasoned business owners still mix these forms up simply because the IRS changed the rules after decades of consistency. But once you recognize that one form reports work performed and the other reports various non-service payments, the distinction becomes clear.

    January deadlines will always create pressure, but filing the correct 1099 now helps avoid unnecessary IRS notices later. And if you receive a form you weren’t expecting – whether it’s a 1099-S or a 1099-C – remember that confusion is normal. This blog exists to help you make sense of the rules and navigate tax season with confidence and clarity.

  • Understanding the Chart of Accounts – What Business Owners Should Really Know

    When I meet with business owners, there’s always a moment I can almost predict. I’ll ask a simple question: “So, how is your Chart of Accounts set up?”

    There heads nod. Their faces stay calm. And they answer with confidence: “Oh yes, we have that.”

    But as we keep talking, the truth slowly appears. Many of them know the phrase “Chart of Accounts,” but not what it really means. And honestly, I don’t blame them. It’s one of those bookkeeping terms that gets thrown around casually, as if everyone were born understanding it.

    Still, the Chart of Accounts is the foundation of your entire bookkeeping system. And understanding it – even at a basic level – can make a huge difference in how well you manage your business.

    So in this post, let’s take the mystery away. I’ll walk you through what a Chart of Accounts truly is, why it matters, and how different industries should think about theirs. You don’t need to be an accountant. You just need to see the bigger picture.


    📌 Quick Definition: Chart of Accounts

    A Chart of Accounts is basically your bookkeeping map.
    It tells your money where to go by organizing every financial activity into clear categories—what you own, what you owe, what you earn, and what you spend.     A clean COA makes your books easier to understand and keeps tax season much smoother.

    What Exactly Is a Chart of Accounts?

    Let me use a simple example.

    Imagine you’re moving into a new house. You have boxes everywhere, and you label them based on what’s inside: “Kitchen,” “Bathroom,” “Tools,” “Bedroom,” and so on. When you unpack, everything has a home.

    Your Chart of Accounts works the same way. It’s just the list of “boxes” you use to organize your financial activity.

    It includes major categories like:

    • Assets (what you own)
    • Liabilities (what you owe)
    • Equity (your investment in the business)
    • Income (money coming in)
    • Expenses (money going out)

    But the most important thing to know is this: A Chart of Accounts is not created for your accountant. It’s created for your business.

    It’s meant to help you see what’s happening, make informed decisions, and avoid messy surprises later.

    Why the Chart of Accounts Actually Matters

    Let me share a quick story.

    A few years ago, I worked with a small business owner who was frustrated because her reports never made sense. She felt like she was doing everything right: recording expenses, invoicing clients, keeping receipts. But her profit never matched her expectations.

    After a quick review, I found the issue. Her Chart of Accounts had grown into a tangled forest – more than 250 accounts, many duplicated, many unused, and many created on the fly by previous bookkeepers. Nothing was grouped properly, so nothing told a clear story.

    Once we rebuilt her COA, her financial reports finally made sense. She looked at the new Profit & Loss and said, “Why didn’t anyone explain this earlier?”

    That’s why you COA matters.

    A clean, well-structured Chart of Accounts helps you:

    • Understand how your business is actually doing
    • Prepare for taxes smoothly
    • Budget and forecast with confidence
    • Catch mistakes early
    • Avoid audit headaches
    • Communicate clearly with lenders, investors, or partners

    It’s like cleaning your glasses – you suddenly see everything clearly.

    The Problems I See in Real Small Business

    I’ve seen hundreds of COAs over the years, and most of them fall into a few predictable categories.

    1. The “Everything Has Its Own Account” COA

    This one has hundreds of accounts. Every vendor becomes an account. Every little thing gets its own category. It’s overwhelming and impossible to maintain.

    2. The “One-Size-Fits-All” COA

    Someone downloaded a template from the internet or copied a friend’s COA – and then tried to force it onto their business. The result? Constant confusion.

    3. The “Miscellaneous for Everything” COA

    If “Miscellaneous” has more activity than your actual expense categories, we have a problem.

    4. The “Good Intentions, Bad Structure” COA

    Created slowly over years by different bookkeepers, interns, family members, and software auto-additions. No structure. No consistency.

    5. The “Tax Categories Pretending to Be Accounts” COA

    Tax return categories do not belong in your operational accounting. But I see this all the time.

    What a Good Chart of Accounts Looks Like

    A strong COA isn’t complicated. In fact, it usually feels surprisingly simple.

    A good one is:

    • Clear
    • Logical
    • Consistent
    • Industry-appropriate
    • Easy for a non-accountant to understand

    And here’s a test I always use: If someone new joined your business tomorrow, could they look at your COA and quickly understand what belongs where?

    If yes, then you’re in great shape.

    Industry Examples: How a COA Should Look Depending on Your Business

    Let me give you a few real-world examples. These aren’t templates – they’re just starting points to help you picture what matters most in real industry.

    1. Law Firms

    Law firms require extra care because of trust accounting. IOLTA, client funds, and operating funds must never mix. A good COA makes that separation clear.

    Income

    • Legal Service Fees
    • Consultation Fees
    • Retainer Fees Earned

    Expenses

    • Court Filing Fees
    • Research Tools (Westlaw, LexisNexis)
    • Contract Attorney Fees

    When a law firm has the wrong COA, it’s not just messy – sometimes it’s risky.

    2. Construction Companies

    Construction accounting is its own world. Job costing is everything.

    COGS (Cost of Goods Sold)

    • Direct Labor
    • Subcontractors
    • Materials
    • Equipment Rentals

    Expenses

    • Permits
    • Safety Supplies
    • Vehicle/Equipment Maintenance

    Without a proper COA, construction owners end up guessing which jobs were profitable and which ones weren’t. And guessing is expensive.

    3. Consultants / Service-Based Businesses

    Consultants often have simpler structures, but clarity still matters.

    Income

    • Consulting Fees
    • Training / Speaking Revenue

    Expenses

    • Software Subscriptions
    • Travel
    • Education / Courses
    • Advertising

    A clear COA helps consultants see where their time is profitable – and where it’s not.

    4. Government Contractors

    If you’re in government contracting, your COA becomes your best friend.

    You need to separate:

    • Direct Costs
    • Fringe Benefits
    • Overhead
    • General & Administrative

    Your COA lays the foundation for your indirect rates – and DCAA will absolutely look at that.

    How to Improve or Rebuild Your Chart of Accounts

    If your COA feels overwhelming right now, don’t worry. Most businesses start that way.

    Here’s a simple approach to fixing it:

    • Review every account
    • Remove what you don’t use
    • Merge duplicates
    • Create meaningful categories
    • Keep naming consistent
    • Avoid creating new accounts every time something unusual happens
    • And most importantly – keep it simple

    Your COA should help you make decisions, not confuse you.

    Simple Do’s and Don’ts

    Do

    • Tailor your COA to your industry
    • Use clear naming
    • Keep the structure consistent
    • Review it at least once a year

    Don’t

    • Overcomplicate it
    • Let “Miscellaneous” become your default
    • Mix personal and business expenses
    • Create an account for every one-time purchase

    Final Thoughts

    Your Chart of Accounts should not feel intimidating. Think of it as the quiet foundation under your business – the part no one talks about, but everyone depends on.

    If you set it up well, your financial reports finally start telling the truth. Decisions become clearer. Tax season becomes calmer. And your business becomes easier to manage.

    So take a moment this month to look at your COA with fresh eyes. You might be surprised how much clarity it brings.

  • DCAA Audit 101 for New and Prospective Government Contractors

    When I first started registering my business for government contracting, I saw the term “DCAA audit” and ignored it. I thought it had nothing to do with my business. After all, I wasn’t a defense contractor, I wasn’t winning any major contracts yet, and I certainly wasn’t preparing responses to RFPs for the Department of Defense.

    I was wrong.

    If you are new to government contracting – or you’re simply thinking about becoming a government contractor – this is a term you should understand early, long before you win your first award. The purpose of this article is not to overwhelm you. This is not an in-depth instruction manual. Instead, think of this as a simple, plain-English introduction I wish I had when I began my own government contracting journey.

    Before even if you never deal with the Department of Defense, DCAA standards influence a large part of federal contracting, especially when it comes to how contractors handle their books, track labor, and support their costs.

    Let’s break it down in a way that makes sense, even if you don’t have an accounting background.

    What Exactly Is DCAA? (Explained without the Jargon)

    DCAA stands for Defense Contract Audit Agency. Their job is to review, audit, and evaluate whether government contractors:

    • keep accurate financial records
    • Track labor hours properly
    • Charge the government fairly
    • Maintain an accounting system that supports government rules

    Although DCAA works for the Department of Defense, its standards are widely used across other federal agencies. Many procurement officers – especially in service-based contracts – look to DCAA guidance when reviewing a contractor’s financial readiness.

    You don’t have to be a defense contractor to be influenced by DCAA. Most small service providers eventually realize that even basic government contracts require some level of cost tracking and internal controls.

    What Does a “DCAA Audit” Really Mean?

    For beginners, the term “DCAA audit” usually refers to the agency checking whether your accounting system, timekeeping, and cost structure can support government requirements.

    Here are the major concepts in the simplest form:

    1. Accounting System Review (SF 1408)

    Before some awards – especially cost-type contracts – the government (or prime contractor) wants to know if your accounting system can:

    • Separate direct vs. indirect costs
    • Track labor hours by project
    • Maintain accurate, timely financial records
    • Support government invoicing requirements

    This is often the first DCAA-related review small contractors encounter.

    2. Timekeeping Expectations

    Government contracting takes labor tracking seriously. Even if you are the only person in your company, you need a consistent, reliable method to record your hours.

    3. Cost Documentation

    The government may ask contractors to justify their rates, pricing, or expenses. A good accounting system makes this possible.

    That’s it for now. You don’t need to know the deep audit types. Just understanding these three broad concepts puts you ahead of most new contractors.

    Why You Should Learn About DCAA Before Winning a Contract

    Most people assume DCAA becomes relevant after they win a contract. In reality, you may be asked about your accounting system during the proposal stage.

    Here’s why early awareness matters:

    1. RFPs may ask whether you have a “DCAA-compliant accounting system.”

    If you’ve never heard of SF 1408 or indirect rates, this can feel intimidating unless you’ve already prepared.

    2. Some agencies require proof of financial readiness before awarding a contract.

    They want to ensure you can manage federal dollars properly.

    3. Early preparation prevents future headaches.

    Trying to fix your books after the fact is much harder and more expensive.

    4. Even if you don’t win a contract right away, clean financials make your business stronger.

    Government contracting or not, accurate accounting helps with taxes, budgeting, and decision-making.

    Learning the basics now pays off later – whether your first contract comes next month or next year.

    The Broad Concepts DCAA Cares About (In Plain English)

    Think of DCAA compliance as a house. You don’t start with the roof. You start with the foundation. These are the foundational pieces:

    1. Can You Track Costs Clearly?

    The government wants to know:

    • What expenses are direct (tied to a specific contract)
    • What expenses are indirect (general business costs)
    • Whether you mix personal and business finances

    Even a simple spreadsheet or accounting software can handle this when set up correctly.

    2. Do You Have a Reliable Timekeeping method?

    Timekeeping doesn’t have to be complicated. It must simply be:

    • Consistent
    • Accurate
    • Recorded daily
    • Assigned to the right project or task

    Whether it’s a software tool or manual entry, the key is reliability.

    3. Are Your Books Complete and Current?

    DCAA (and contracting officers) want to see:

    • Timely financial records
    • Clear documentation for transactions
    • Accuracy across all your books

    This is less about sophistication and more about discipline.

    4. Can your System Support Government Billing Rules?

    You don’t need to issue government invoices today, but your system should be able to grow into it.

    Common Misunderstandings Among New Government Contractors.

    These are misconceptions I see very often:

    “I’ll focus on DCAA once I win something.”

    You may be asked for system readiness before an award. Preparation begins now.

    “DCAA is only for large defense companies.”

    Not true. Many small service contractors must follow the same standards.

    “DCAA compliance requires expensive consultants.”

    You can understand the basics yourself. With the right structure and guidance, small businesses can get audit-ready without spending thousands.

    “It’s too complicated for someone without an accounting degree.”

    You don’t need to master every detail – just start with the fundamentals.

    Where You Can Start Today (Simple, Beginner-Friendly Steps)

    Here are a few easy steps you can take now, even before your first government contract:

    • Separate your business and personal finances

    A dedicated business checking account is the first step toward clean books.

    • Set up a basic chart of accounts with direct and indirect categories

    This doesn’t need to be perfect. Start simple.

    • Begin tracking your time

    Even if you’re not billing anyone yet, get into the habit.

    • Keep organized documentation

    Receipts, invoices, payroll records, and bank statements matter.

    • Review the SF 1408 form

    You may not understand everything today, but it gives you a sense of what the government looks for.

    • Build good habits early

    Consistency is more important than complexity.

    These steps alone put you ahead of most new contractors.

    Final Thoughts

    If this is your first time learning about DCAA, I know it may seem confusing or even unnecessary at this stage. I felt the same way. But understanding these basics early gives you confidence, prepares your business properly, and helps you avoid costly mistakes later.

    You don’t need to know everything today. Government contracting is a learning journey, and taking it one concept at a time is the best way forward.

    And remember – new government contractors and small business owners already wear so many hats. Yes, you can learn these details on your own, but trying to figure out every requirement by yourself isn’t always the best use of your limited time. None of us can do everything alone. Sometimes having a little guidance from the outside simply makes the process smoother and keeps your business moving forward without unnecessary stress.

    I’ll continue sharing more DCAA topics in future articles – each one building on what you learn here, at a pace that makes sense for small business owners navigating this process for the first time.

  • “December Reality Check: Preparing Your 2025 Business Taxes Without the Panic”

    Every year around this time, businesses rush to wrap up projects, handle holiday sales, close the books, and prepare for the new year. And yet, something important gets pushed aside:

    Getting ready for tax season.

    Unlike individuals, who often only need W-2s and a few forms, business tax returns require real preparation – documents, receipts, reconciliations, and decisions.

    But very few business owners start early.

    I’ve met countless business owners (and individuals, too) who feel completely overwhelmed by tax time even though they had weeks and months to prepare.

    And the same pattern repeats every year.

    So let’s break the cycle now.

    Why December Matters More Than You Think

    If you prepare now, you avoid:

    • last-minute scrambling
    • missing documents
    • wrong numbers
    • filing extensions you didn’t need
    • penalties
    • and unnecessary stress

    When March arrives, you want to be reviewing your tax return – not trying to remember what happened in January 2025.

    December is the perfect time to get organized while everything is still fresh.

    What Every S-Corporation & Partnership Should Do Before January 31

    These steps apply to almost every business – simple, practical, and highly effective.

    1. Reconcile ALL bank and credit card accounts through November

    If your books are not reconciled, your tax return literally can’t be prepared correctly.

    • Make sure deposits match income
    • Categorize expenses
    • Verify transfers
    • Clean up duplicate transactions

    This alone prevents 70% of common tax problems.

    2. Review owner distributions, contributions, and loans

    For S-Corporations, reasonable compensation comes into play.

    For Partnerships, capital accounts matter.

    December is the last chance to correct misclassified transactions.

    3. Run a preliminary Profit & Loss and Balance Sheet

    Not the final version – just a preview.

    Ask yourself:

    • Does the income look accurate?
    • Are large or unusual expenses correct?
    • Are assets recorded properly?
    • Does the balance sheet even make sense?

    If the numbers seem “off,” they probably are.

    4. Gather your year-end documents BEFORE they disappear

    Business owners often lose these:

    • Payroll reports (especially if switching payroll companies)
    • Loan statements
    • Vehicle mileage logs
    • Inventory counts
    • Receipts for large purchases
    • Health insurance and retirement plan payments

    These documents are crucial and often hard to retrieve months later.

    5. Schedule a tax planning conversation – even if short

    You still have December tax-saving options, such as:

    • Section 179 & Bonus Depreciation decisions
    • Retirement contributions
    • Timing income and expenses
    • Shareholder/Partner adjustments
    • Estimated tax payment planning

    Waiting until February or March is too late.

    6. Close out 2025 intentionally

    Set aside time – even one hour – to note:

    • Major business changes this year
    • New contracts
    • New Assets
    • Employees or contractors added
    • Any cash transactions
    • Anything unusual

    This helps your tax preparer understand the full picture.

    Why So Many Business Owners Fall Behind

    It’s not because they don’t care.

    It’s because:

    • They are busy.
    • They don’t know where to start.
    • They assume they’ll “do it after the holidays.”
    • Tax paperwork feels overwhelming.
    • They underestimate how much time it actually takes.

    But being unprepared makes tax season far more stressful and expensive than it needs to be.

    The Benefit of Starting Now

    Preparing in December gives you:

    • calmer January
    • accurate financials
    • fewer tax surprises
    • time to fix issues
    • stronger conversations with your tax professional
    • better tax savings
    • more control and confidence

    And honestly, it just feels good to start the new year clean.

    A Simple December Goal for Every Business

    Here it is:

    “By December 31, have everything ready so that in January you can hand your tax preparer clean, organized books, not a box of chaos.”

    That one goal will transform your tax season.

    Final Thought

    Tax time doesn’t have to be overwhelming.

    It becomes overwhelming only when everything is left for later.

    If you start now – this week, this month – your 2025 business tax return will be smoother, faster, and far less stressful.

    December is busy, but a few intentional steps now will save you weeks of stress in March.