The information below about issuing 1099s was provided in the January 2017 newsletter produced by:
Gail Rosen, CPA, PC
2032 Washington Valley Rd.
Martinsville, NJ 08836
1099 FORMS NOT OPTIONAL – REQUIRED BY LAW
We wanted to provide this reminder to ensure you meet this obligation for all 2016 payments to unincorporated individuals and businesses of $600 or more (rents, services, prizes, attorney fees, etc.). The IRS is increasingly focusing their attention in this area since it is the agency’s main weapon against under reporting of income. Penalties and audit risk can be avoided with proper filing.
The Protecting Americans from Tax Hikes (PATH) Act, enacted last December included a new requirement requiring employers to file their copies of Form W-2 submitted to the Social Security Administration, by January 31st. The new filing deadline also applies to certain Forms 1099-MISC reporting non-employee compensation such as payments to independent contractors. The January 31st deadline has long applied to employers furnishing copies of these forms to their employees while, in the past, employers typically had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit their copies of these forms. Please be mindful of this change.
If you are looking to us to prepare any required 1099s, please forward the required information as soon as possible so we can help you meet the required January 31, 2017 filing deadline for distribution to those individuals and to the taxing authorities.
Consider making a copy of this memo for your designated employee/bookkeeper.
We strongly encourage our business clients, clients filing a Schedule C/C-EZ and other such friends of the firm consider the following:
- Sending 1099 forms is not optional, it is the law. The various Forms 1099 provide the means of reporting very specific income types from non-employment related sources that might not be captured elsewhere. If your business paid someone (other than employees on payroll or for product purchases) the taxing authorities want to know about it. In fact, business income tax returns (that includes the 1040 for a sole proprietor) even include a question asking if Forms 1099 were filed as required with your signature, under penalty of perjury, certifying your response to be true.
- Do not send a 1099-MISC to an employee since that is what a W-2 is for.
- First, you need to determine if you have a trade or business. If you are operating to make a gain or profit, you have a trade or business. If you run a nonprofit organization, a government agency, or a trust of a qualified pension or profit-sharing employer plan, such are considered trades or businesses for 1099 purposes. While the IRS might have previously abated the steep penalties, we’re advised such may not be the case in the future.
- Do not send a 1099-MISC to someone when you have made a personal payment to him or her. An independent contractor to whom you have made a personal payment unrelated to your “trade or business’ doesn’t receive a 1099.
- Thoroughly review all disbursements made from January 1, 2016 through December 31, 2016, summarizing all payments to unincorporated individuals and businesses where the accumulated total is $600 or more. You should make sure that you have the correct name, employer identification or social security number and address. If you’re unable to confirm if a particular establishment is a corporation or not, issuing a 1099 might be a wise precaution.
- Beyond having to possibly face a government audit, if you fail to file the correct information by the deadline, fail to include all the required information on a return, or if you include incorrect information, you can be subjected to an array of steep penalties if you cannot show reasonable cause. If the payee fails to furnish his or her taxpayer identification number (TIN), they are subject to backup withholding at a 28% rate. If you do not collect and pay backup withholding from affected payees as required, you may become liable for any uncollected amount.
- A good accounting policy is to require every vendor to complete and provide a W-9 before you pay them. This is the best way to collect the information needed to determine, (a) if they need a 1099 and (b) how it should be issued. With the W-9 on file, you can eliminate the hassles of phone calls to individuals wary of giving you their social security number; avoid having to chase down independent contractors who moved (or don’t return phone calls); or having to wait on hold while someone at a vendor’s office tries to track down a federal identification number. (Sound familiar? We suggested doing this at the beginning of last year, as well).
- Firms maintaining trust or escrow accounts need to review these disbursements as well. Payments frequently overlooked–where 1099s should be issued– include payments out of these trust accounts as well as disbursements for interest, rentals, contracted services (other than for employees), part-timers where W-2s are not required or issued, commissions, individuals performing plant maintenance or cleaning services, etc. Forms 1099 are required for individuals, partnerships, LLCs, etc. Do not assume that just because a payment is made to a “company,” that it is a corporation.
- Involved with as many lawyers and law firms as we are, we’ve seen confusion abound in this arena. We’re not trying to frighten you, but did you know that the IRS has a special manual which deals exclusively with auditing lawyers (call us separately to so discuss)? Well, straight from the IRS audit guide specifically dealing with attorneys, is their focus on lawyers not issuing 1099s to independent contractors out of an attorney’s trust account. The argument that the funds belonged to the contractor will not relieve the attorney from this reporting responsibility. 1099s are also required to be filed for payments to recipients of lawsuits unless specifically exempt from taxation (another reason to call us).
- The exemption for payments to corporations does not apply to payments for legal services. Payments to attorneys for legal fees that amount to $600 or more should be reported in Box 7 of Form 1099-Misc, even if the attorney is incorporated. Report in Box 14 of that form payments or gross proceeds paid to an attorney, such as in a settlement agreement, unless the attorney’s fees are reportable by you in Box 7.
- Many clients have followed our suggestion of having 1099s prepared by in-house staff or payroll service bureaus to keep our professional fees at a minimum. Regardless, it is incumbent upon such firms to make sure that they still have someone (like us) review all 2016 expenditures since we have seen far too many types of payments go undetected (and often well beyond the proper due date for reporting).
- Form 1096 is used to transmit the paper forms to the IRS. States like Delaware, New Jersey, and Pennsylvania require filing the 1099s by then as well (at least 1099-Misc). If you are unable to get 1099s out in time, an automatic 30-day extension is available by filing Form 8809.
Please remember that if you fail to file a correct 1099 information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. Again, the penalty applies if you miss the filing deadline or fail to provide complete and/or correct information on the 1099.
The 1099 penalty also applies if you file on paper when you were required to file electronically or your 1099 paper forms are not machine readable. Additionally, penalties may apply if you fail to report or include a correct TIN (Tax Identification Number). The amount of the 1099 deadline is based on when you file the correct information return.