Form 1099 Reporting and Backup Withholding Reporting. Tax Law Reporting Changes. Form 1099 General Requirements

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1 Form 1099 Reporting and Backup Withholding Reporting Washington Association of School Business Officials Spring Conference May 10, 2012 Federal, State and Local Government Internal Revenue Service Clark Fletcher 1 Tax Law Reporting Changes Repeal of corporate reporting (except for legal and medical services) Repeal of mandatory 3% income tax withholding on government payments Reporting of healthcare premiums on W- 2s (Notice ) Eliminating reporting of vendors paid through credit card transactions (Form 1099-K) 2 Form 1099 General Requirements Payments that are: 1. $600* or more, 2. Paid in the course of your trade or business, and 3. Paid to a reportable payee *[Note: banks and financial institutions must report on $10 or more and royalty payment report on $10 or more] 3 1

2 Form 1099-INT 4 Form 1099-MISC information return Form required to report payments for: Rents (Box 1) real and personal property Royalties (Box 2) school productions Other Income (Box 3) decedents & settlements, non-service income Fed. Income tax w/held (Box 4) Medical and health payments (Box 5) - providers Self-employment income (Box 7) - vendors Gross proceeds paid to attorney (Box 14) legal services MISC Box 7 Requirements Payments are $600 or more, Paid in the course of your trade or business, and For services or combination of products and services 6 2

3 Examples of Payments Box 7 Non-employee compensation Commissions Fees All forms of remuneration for services rendered Other Boxes Rents (Box 1) Royalties >$10 (Box 2) Prizes & Awards (Box 3) Medical and health care payments (Box 6) 7 Medical and Healthcare Payments Report payments of $600 or more in Box 6 Report payments to all individuals, partnerships, and corporations Medical payments include doctor fees, drug testing, lab fees, physical therapy, etc. * Do not report payments to pharmacies, tax exempt hospitals, or governmental agencies 8 Report Non-employee Compensation in Box 7 Reportable Payments of $600 or more to: individuals partnerships legal service corporations LLCs LLPs Reportable payments include: commissions, fees for services (may include parts or materials in some instances), fee splits between professionals, referral fees, director fees, etc. 9 3

4 LLC s and Reportable payments One or more owners An LLC may be taxed as either a disregarded entity (sole proprietorship), a partnership, or a corporation by election on Form Obtain a W-9 (Rev.Dec_2011) from the payee to determine their status 10 General Exemptions to Form 1099-MISC Corporate exceptions: Payments to medical and health care service-providers Payments to legal service-providers 11 General Exemptions to Form 1099-MISC Payments for merchandise, telephone, inventory, storage, freight, lodging, and similar items Examples: Office Supplies Telecom charges Hotel costs 12 4

5 Payments to Attorneys Section 1031 of the House Bill and Proposed Regulation codify the requirement to report payments to attorneys (individuals and corporations) gross proceeds, and payments for services of attorneys this change was effective for 1998 and later years 13 Defining Gross Proceeds Gross proceeds are the payments made to an attorney as part of a legal settlement or court order Gross proceeds may be issued in the names of the attorney and the client Gross proceeds may include an amount for the attorney s 14 services Reporting Gross Proceeds If you cannot determine the attorney fees, report all of gross proceeds in Box 14 report amount paid in this format:

6 Reporting Gross Proceeds Example: A school district agrees to settle all matters involved with a property claim for $30,000 and pays the claimant s attorney for a release. Form 1099-MISC: Box 14 = Reporting Gross Proceeds Example: A school district agrees to settle all matters involved with a property claim for $30,000 and issues a warrant to claimant and the claimant s attorney for a release. Forms 1099-MISC (2): Box 14 = (attorney) Box 3 = (claimant) 17 Reporting Gross Proceeds If you can determine the amount of attorney fees included in the gross proceeds: report the fee in Box 7 report nothing in Box

7 Reporting Gross Proceeds Example: A school district agrees to pay $50,000, of which $15,000 is court-ordered attorney s fees, in settlement of a law suit judgment. Form 1099-MISC: Box 7 = Reporting Gross Proceeds Example: An attorney, working on a fee-plus expenses basis, submits an invoice to a school district that show expenses for paralegal work, telephone calls, copying, and his monthly fee. Reportable amount? Form 1099-MISC, Box 7 or 14? 20 Review 1099-MISC Box 7 Requirements 1. Payments are $600 or more, and 2. Paid in the course of your trade or business, and 3. For services or a combination of services and products 21 7

8 When to file Forms 1099-MISC Report payments on calendar year basis Provide copy of Form 1099-MISC to recipient by Jan. 31 of the following year File with IRS by Feb. 28 (paper) or by March 31 st (electronic) of the following year Use separate Form 1096 transmittal for each type of Form 1099 submitted to IRS 22 Common Errors that prevent issuance of correct" or required information returns Failure to obtain identifying information before making payment (use Form W-9) Failure to aggregate payments from all expense categories (use vendor files) Failure to use Tin Matching Program when creating vendor accounts 23 Common Errors that prevent issuance of correct" or required information returns Assuming payee is a corporation: because an EIN is furnished because of LLC designation Filing well before the deadline To allow for initial reporting errors To prevent subsequent filings and possible penalties 24 8

9 Verifying TIN s - check it out! You may verify any Taxpayer Identification Number (TIN*) by registering with the IRS s TIN Matching Program Use of the TIN Matching program will reduce the number of TIN/Name mismatches and protect the payer from civil penalties Register with IRS e-services (* TIN = SSN or EIN) 25 Corrections of Forms 1099-MISC Use Corrected box when amending an unfiled Form 1099-MISC Input original information on top Form 1099-MISC, mark correct, then enter correct information on bottom Form 1099-MISC. Use Void box when amending a filed Form 1099-MISC Use same process as above. 26 Corrections of Forms 1099-MISC Example: Forms 1099-MISC are mailed on Jan. 31 st. On February 20 th, a vendor calls and states the amount is wrong. A record check confirms his statement. What determines if the vendor receives a voided or a corrected Form 1099-MISC? 27 9

10 IRC Section 6721 Penalty Failure to file correct information returns by due date Correctly file by March 31st* $15/return w/$75,000 cap (12/31/2010) $30/return w/$250,000 cap (1/1/2011) Correctly file > March 31st but before August 1st $30/return w/$150,000 cap (12/31/2010) $60/return w/$500,000 cap (1/1/2011) Correctly file August 1st or later $50/return w/$250,000 cap (12/31/2010) $100/return w/$1.5m cap (1/1/2011) 28 IRC Section 6722 Penalty Failure to furnish correct payee statements $50 per Information Return, if furnished after January 31st (12/31/2010) $100 per Information Return, if furnished after January 31st (12/31/2011) 29 IRC 6721 & 6722 Penalties An automatic failure occurs when the information return/payee statement contains errors in the name, taxpayer identification number, and/or amount

11 IRC 6671 & 6672 Penalties Civil penalties are not self-assessable. The IRS will notify the filer if penalties will be assessed unless the filer can establish a reasonable cause for the delayed filing. 31 COMMON QUESTIONS Can I file an extension to file Forms 1099? Yes! Send Form 8809 to the address shown by Jan. 31 for a 30 day extension. What if I file the information returns late? Unless reasonable cause applies, be prepared to pay the 6721 and 6722 penalties. 32 Are you required to do Backup Withholding? Only if you make reportable payments to persons, businesses, or corporations who have not furnished a valid TIN the withholding rate is 28% (2006 and thereafter) backup withholding applies to many payments reported on Form 1099-MISC, some are: box 1 = rents (surface royalties) box 2 = royalties box 7 = non-employee compensation 33 11

12 Backup Withholding Once a reportable payments has been identified, the payor MUST secure a valid federal taxpayer identification number (TIN). A failure to obtain a TIN or a refusal to provide a TIN initiates the backup withholding tax. The payor is liable for the tax, whether or not the tax has been withheld from the vendor s payment. 34 When to begin Backup Withholding backup withholding begins when aggregate payments for the calendar year equal or exceed $600*, or immediately if: 1. payee was subject to backup withholding in the prior year, 2. IRS notified the agency to begin backup withholding on a vendor, or 3. payee provided invalid TIN 2-of-3 year rule. * Includes Interest 35 When to begin Backup Withholding Missing/Incorrect/Erroneous TIN Notice Program Annual notification by the IRS Requires agency to take actions to cure the errors and update records Requires agency to match prior years notices to current notice (2-of-3 year rule) 36 12

13 How to report Backup Withholding Report withholding to payee and to IRS in Box 4 of Form 1099-MISC Form 945 is used to report and pay backup withholding to the IRS. This is an annual return, due 1/31/xx ordinary deposit rules apply (EFTPS) make Form 945 deposits separate from Form 941 deposits 37 Backup Withholding Review 1. Must have reportable payments 2. Must be a reportable entity 3. Must report correct vendor s name, amount, and TIN as shown on IRS forms 4. Must review prior year s mismatch notices to identify reportable entities 38 RESOURCES FORMS 1099 Questions » (8:30-4:30 PM EST.) Forms » Instructions for Forms 1099, 1098, 5498, and W-2G (Catalogue #11409F) 39 13