You generally have until January 31 to prepare and mail 1099s to recipients. You've generally got until February 28 to mail the required copy to the IRS. This article isn't intended to provide all the details on filing 1099s. Rather, we want to make you aware of some frequently overlooked details. If you find you need to file some 1099s and haven't, contact us immedately.
Penalties
They've gone up. For information returns required to be filed on or after January 1, 2011, the penalties are:
- If you file a correct return up to 30 days after the required filing date, the first-tier penalty is $30 per return, with a maximum of $250,000 ($75,000 for small businesses).
- If the correct return is filed more than 30 days late but on or before August 1, the second-tier penalty of $60 per return applies, with a maximum of $500,000 ($200,000 for small businesses).
- If the correct return is not filed on or before August 1, the third tier penalty of $100 applies ($1.5 million maximum; $500,000 for small businesses).
If the failure to file a return or to include the required information is due to intentional disregard of the rules, the above penalties don't apply. Instead, the penalty is the greater of $250 per return or 10% of the amount required to be reported on 1099-MISC and certain other returns. There is a de minimis exception, but it's fairly narrow. In addition, if you must file 250 or more information returns, you must file electronically. There are substantial penalties for failure to do so.
There's a second penalty of $100 per statement for failure to furnish the statement to the payee. This penalty has a maximum of $1.5 million per year ($500,000 for small businesses). As with the penalties for failure to file with the IRS, the penalty is tiered--$30 (instead of $100) if corrected within 30 days the penalty is only $30 ($250,000 maximum, $75,000 for small businesses); if on or before August 1, $60 ($500,000 maximum, $200,000 for small businesses). For intentional disregard of the rules the penalty is the greater of $250 or 10% of the total amount required to be reported correctly.
Clearly, failure to file even a few returns can be very costly.
While we're on the subject of penalties, you can't avoid withholding, FICA, unemployment, etc. by giving a worker a 1099-MISC when they really should be classified as an employee and get a W-2. But you may be able to reduce your penalties for misclassifying a worker as an independent contractor by giving him or her a 1099. The rules are involved. Talk to your accountant or tax advisor.
Forms You May Have to File
1099-MISC. This is the one you're probably most familiar with. This is the form you use for independent contractors. Many businesses only consider those individuals who do work related to the purpose of the business. For example, a machine shop might give 1099s to a subcontractor who has his own shop. But you have to provide a 1099 to any business other than a corporation who performs services for your business. For example, the auto mechanic who repairs the company truck; the electrician who came in to add outlets in your office; etc. You must also send a 1099 to the person to whom you pay office or other rent. For this filing year, the old requirements apply. That is, you don't have to send out a 1099 on rental properties if you're not in the trade or business of renting property, and the controversial requirement to send a 1099 to providers of goods as well as services doesn't apply. That changes for payments made in 2011. Here's a list of other payments that might have to be reported on a 1099:
- payments to attorneys (even if a corporation)
- amounts paid to accountants, architects, contractors, engineers
- auto reimbursements
- awards
- bonuses
- commissions to nonemployee salespersons (even if subject to repayment)
- travel, expense, etc. reimbursements to independent contractor for which the contractor did not account
- exchanges of services between individuals (barter transactions)
- compensation
- damages
- director's fees
- fees
- fishing boat crew members proceeds
- fish purchases for cash
- health care services (even if a corporation)
- nonqualified deferred compensation
- prizes
- rents
- vacation allowance
- fees paid by one professional to another, such as fee splitting
Only report nonemployee payments on a 1099-MISC. If the individual is an employee, the amount should be reported on his or her W-2. For example, a bonus paid to an employee is reported on a W-2; a bonus to an independent contractor belongs on a 1099. (Amounts paid to the estate of a deceased employee are reportable on a 1099-MISC. Death benefits from nonqualified deferred compensation plans paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-MISC. Check the instructions.)
You don't have to send a 1099-MISC to a party that provides you only with goods. (See the comment above.) For example, you buy auto parts from a local distributor and one of your employees repairs the vehicles. But a 1099 is required to an auto repair shop even if the value of the services is relatively small. For example, it's $2300 for the parts; $150 for the labor. The 1099-MISC should be for $2450. If state or local sales taxes are imposed on the service provider and you (as the buyer) pay them to the service provider, report them on the 1099. However, if sales taxes are imposed on you (as the buyer) and collected from you by the service provider, do not report the sales taxes.
If you don't classify payments by vendor as well as by general ledger account, you should go through your records to see who you might owe a 1099. That can include the service that cleans the office; your attorney who's on retainer (or paid by hour); etc.
You generally don't have to report payments made to a corporation. The exceptions are payments to attorneys, for medical services, and fish purchases for cash. In these cases even if the provider does business as a corporation, the payments are reportable. What about other providers? Don't know if the business is a corporation, LLC, sole proprietorship? Did the person provide goods or services? Sending a 1099-MISC where one is not required has no adverse consequences (just more paper). Many businesses, even large ones, send 1099s to every vendor.
You must report fees paid by one professional to another, such as fee-splitting or referral fees. Report commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year. Fees paid to a nonemployee, including an independent contractor or travel reimbursement for which the nonemployee did not account to the payer, if the fee and reimbursement total at least $600.
Report a fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to you (the payer), if the fee and the reimbursement total at least $600.
When an escrow agent maintains owner-provided funds in an escrow account or a construction project, performs management and oversight functions relating to the construction project, and makes payments for the owner and the general contractor, the escrow agent must file Form 1099-MISC for reportable payments of $600 or more.
The reporting threshold for nonemployee compensation, services, etc. and rents is $600. If the amount paid during the year is $600 or more, you owe the recipient a 1099-MISC. (The threshold is only $10 in the case of royalties.)
For coin-operated amusements, if the arrangement between the owner of the amusement and the owner of the business establishment where the amusements are placed is a lease of the amusements or the amusement space, the owner of the amusements or the owner of the space, whoever makes the payments must report the lease payments in box 1 (Rents) if the total payments are at least $600.
1099-INT. This form is for interest payments. It's easy to overlook this one. But there's a good chance the business made interest payments to a shareholder for a loan. The business may have made interest payments on funds borrowed from an angel investor or relative, on accounts payable, etc. The reporting threshold is $600 for such payments (it's $10 for banks, credit unions, etc.).
1099-DIV. Regular (C) corporations that pay dividends have to report such amounts on a 1099-DIV. Whether or not a distribution is a dividend depends on a number of factors. Generally a payment from a C corporation's earnings and profits (similar to retained earnings) is a dividend. Dividends to a recipient of $10 or more are reportable. Liquidating dividends are reportable when they amount to $600 or more. (Under certain circumstances, distributions by an S corporation could be reportable dividends.)
1099-A. You may have to report the acquisition or abandonment of secured property for each borrower if you lend money in connection with your trade or business and, in full or partial satisfaction of the debt, you acquire and interest in property that is security for the debt, or you have reason to know that the property has been abandoned. You don't have to be in the business of lending money to be subject to this reporting requirement. You don't have to file a 1099-A if tangible personal property is used solely for personal purposes. The reporting threshold is $600.
1099-C. Report the cancellation of a debt of $500 or more owed to you if lending money is a significant trade or business for you. The lending of money is a significant trade or business if money is lent on a regular and continuing basis. The law contains a safe harbor. Generally if lending provides 10% or more of the organization's gross income, the lending of money is significant.
8027. Employer's Annual Information Return of Tip Income and Allocated Tips. This reporting requirement applies to receipts from large food or beverage operations, tips reported by employees and allocated tips. Check with your accountant or tax adviser for the rules.
1042. Use Form 1042S to report tax withheld on certain income of foreign persons, including nonresident aliens, foreign partnerhips and corporations, and foreign estates and trusts.
Other Points
Reporting period. Forms 1098, 1099, 3921, 3922, and W-2G are used to report amounts received, paid, credited, donated, transferred, or canceled (Form 1099-C) during the calendar year.
Specific instructions. The IRS has some specific rules such as no dollar signs, no entry for zero amounts, etc. Using a software program to prepare the returns will automatically handle these issues. The programs are generally cheap and well worth it.
Retention rules. Generally, keep copies of information returns filed with the IRS or have the ability to reconstruct the data for at least 3 year (4 for Form 1099-C) from the due date of the returns. Keep copies of information returns with backup withholding for 4 years.
State reporting. You may also have to file state copies of 1099s. Contact us if you gave any questions.
Need more help? Download the General Instructions for Forms 1099, etc. or the Instructions for Form 1099-MISC or Instructions for Form 1099-INT.
If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.