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by Bill Leary, CPA, Director, Tax Group, Doeren Mayhew
As we approach February, taxpayers need to consider whether they are required to file information returns (Form 1099s) with payees and the Internal Revenue Service (IRS) by Feb. 28, 2013. The IRS is becoming more serious about income reported on Form 1099s, and business owners can be held liable and face penalties for not reporting income paid to a qualifying vendor.
“Information returns” includes a series of 1099 forms required by the IRS that report the various types of income paid (or received, in some cases) throughout the year, other than the salary paid to employees. One of the most common reports interest paid on mortgages, but the information reporting rules are far more inclusive.
Information reporting on IRS Form 1099 has been required for certain business-related payments, as well as passive-type payments, for more than 60 years. More than 85 million Forms 1099-MISC are filed each year by some 4.2 million filers. In general, information reporting requirements relate to payments that may result in taxable income for the payee.
Taxpayers engaged in a trade or business must file Form 1099 to report certain payments made to U.S. non-exempt recipients (which include partnerships and individuals) who are not partners or employees receiving W-2s (payments to foreign persons and foreign partners with U.S. businesses or investments are subject to separate reporting requirements).
Reporting is required for certain payments including rents, interest, dividends, royalties and payments for services, including independent contractors. If the total amount of payments made to a payee over a year equals at least $600, the payer is required to file an information return with the IRS providing information identifying the payer, the payee, and the total amounts paid to that payee over the past calendar year. Some of the more typical situations requiring reporting include:
1 A Form 1042-S (Foreign Person’s U.S. Source Income Subject to withholding) is used to report income paid to a non-resident regardless of whether the payment is taxable. Unlike form 1099, form 1042-S is not due to be issued until March15th of every year.
2 See, e.g., http://www.irs.gov/Businesses/U.S.-Tax-Withholding-on-Effectively-Connected-Income-Allocable-to-Foreign-Partners and Rocen et. al, “The U.S. Payors’ Guide to Cross-Border Withholding and Reporting,” International Tax J. (January-February 2010) http://www.millerchevalier.com/portalresource/lookup/poid/Z1tOl9NPl0LTYnMQZ56TfzcRVPMQiLsSwCJDm83!/document.name=/TheUSPayer’sGuidetoCross-BorderWithholdingandReporting.pdf
Other common reporting situations include landlords whose rental activities constitute a trade or business; these taxpayers are obligated to report payments to unincorporated service providers of $600 or more.
In general, reporting such payments is required if the recipient of the payment is not a corporation – for example, when the recipient is an individual, partnership, limited liability company treated as a partnership under federal tax rules or sole proprietorship. Payments made to attorneys in the course of a trade or business are required to be reported on a Form 1099 regardless of whether the attorney is incorporated or unincorporated. Payments made to corporations are also required in the case of medical and health care payments. Credit card companies and similar businesses must report the annual gross dollar amount of payment card transactions settled for each of their merchant payees.
Information returns must be provided to taxpayers by Jan. 31, 2013, reporting income for the previous calendar year, regardless of the businesses’ year-end. Extensions are not available. Filing with the IRS is due by Feb. 28 (or March 31, if electronically filed). In addition to information about the return preparer and payee, the returns must include the recipient’s social security number or Federal EIN, which can be supplied on IRS Form W-9 (“Request of Taxpayer Identification Number and Certification”). If a payee is not willing to provide this number, you can withhold 28 percent of the invoice amount as backup withholding and submit it to the IRS. The vendor would then have to report income to the IRS in order to recover the money withheld.
Taxpayers are now required to explicitly confirm their compliance with Form 1099 reporting when they make their annual tax filing. Failure to file on time can result in penalties of up to $100 per payee, with a maximum penalty of $1,500,000. If the failure to file is due to intentional disregard, however, the penalty is increased to $250 per payee, and there is no limit on the amount of the potential penalty.
3 Beginning January 1, 2013, withhold, on behalf of the IRS, 28% of gross dollar payment card transactions settled for any merchant who fails to furnish their TIN to the credit card company or for whom the merchant’s legal name and Taxpayer Identification Number (TIN) reported on a Form 1099-K do not match according to the IRS’s records
Bill Leary is a Director in the Tax Group at Doeren Mayhew, and can be reached at 713.789.7077 or firstname.lastname@example.org. For more information on IRS or state and local information reporting, contact our CPAs in in Troy, Mich., or Houston, Texas.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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