1099 Tax Information Reporting
The outcome of the presidential election has been determined. With a higher tax prospect in mind, we have an update to our last month’s article regarding tax depreciation options before we discuss the 1099 tax reporting requirements. The increase in penalties and the change in the government leadership makes correct 1099 reporting a timely subject.
A Few Quick Updates
Tax Depreciation Update
In November, after our December article was written, the IRS said it was withdrawing the so-called “Partnership Look-through Rule” that it issued in 2019 because it would place a significant administrative burden on both taxpayers and the IRS.
The IRS also released additional guidance for taxpayers wishing to manage bonus depreciation for certain depreciable property the taxpayer acquired and placed in service on or after September 28, 2017, and before the taxpayer’s first tax year that begins on or after January 1, 2021; This revenue procedure is complicated and effective November 6, 2020.
Tax Planning Opportunity
A business may now make a late election or revoke an election under the bonus depreciation regulations. This may be accomplished simply by filing a Federal amended income tax return for the placed-in-service year of the property, or for the planting year of the specified plant, as applicable, on or before December 31, 2021. However, in no event can it be later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed (i.e., March 15, 2021 and April 15, 2021 respectively for 2017 corporate and individual returns filed without an extension).
Information Return Reporting
Penalties
Proper filing of information returns is more important than ever. The penalty due to intentional disregard of the requirements to furnish a correct payee statement has increased. The revised penalty is at least $500 per payee statement with no maximum penalty. A business should not ignore these filing requirements. Late filing penalties also increased as follows.
$50 per information return if you correctly file within 30 days of the February 1; maximum penalty $500,000 per year ($175,000 for small businesses)
$100 per information return if you correctly file more than 30 days after the February 1, but by August 1; maximum penalty $1,500,000 per year ($500,000 for small businesses)
$250 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,000,000 per year ($1,000,000 for small businesses)
Forms Possibly Required
If during the calendar year your business made reportable payments, you are required to file an information return to the payee and IRS by February 1, 2021. It is important to file the appropriate information return for each type of payment you make in the course of your trade or business:
W-2 for employee wages
Form 1099-MISC for $10 or more in royalties or broker payments or $600 or more for Rents, Prizes and awards, Other income payments, Generally, cash from a notional principal contract to an individual, a partnership or an estate, Any fishing boat proceeds, Medical and health care payments, Crop insurance proceeds, Section 409A deferrals, Nonqualified deferred compensation and any direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (i.e. flee market vendors). It is important that you place the payment in the proper box on the form. Refer to the instructions for more information.
Form 1099-NEC Beginning with tax year 2020, employers must use Form 1099-NEC to report nonemployee compensation instead of Form 1099-MISC
Form 1099-INT Interest on a business debt to someone (excluding interest on an obligation issued by an individual)
Form 1099-DIV Dividends or other distributions to a company shareholder
Form 1099-R Distribution from a retirement or profit plan or from an IRA or insurance contract
Form 1099-K for payments to merchants or other entities in settlement of reportable payment transactions, that is, any payment card or third-party network transaction Received a Payment and Other Reporting Situations
If, as part of your trade or business, you received any of the following types of payments, file appropriate information return listed:
Form 1098 Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals
Form 1099-S Sale or exchange of real estate
Form 1099-B You are a broker and you sold a covered security belonging to your customer
Form 8937 if you are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others
Form 1099-A if you released someone from paying a debt secured by property or someone abandoned property that was subject to the debt
Form 1099-C or otherwise forgave their debt to you
Other forms you may receive
Form 1099-PATR reports taxable distributions received from cooperatives.
Form 1099-G reports certain payments from the federal government – such as CRP payments
Seems straightforward but the devil is in the detail and the penalties can mount quickly. Choosing the correct form is important but reporting the correct amount is as important.
More on the New Form 1099-NEC
Beginning with tax year 2020, employers must use Form 1099-NEC to report nonemployee compensation. If the following four conditions are met, you must generally report a payment as nonemployee compensation if:
You made the payment to someone who is not your employee.
You made the payment for services rendered in the course of your trade or business.
You made the payment to an individual, a partnership, an estate or, in some cases, a corporation. (Note LLC’s are legal corporations but may be any one if these for tax purposes. Consult our tax advisor if uncertain how it is being taxed)
You made payments to the payee that were accumulatively at least $600 during the year.
Note you are required to furnish Form 1099-NEC to the payee and file with the IRS by February 1, 2021.
The details
Businesses regularly pay for services performed by individuals who are not their fulltime employees. Typical compensation includes payments to self-employed workers and contractors. When the sum of all payments made to the person or unincorporated business is $600 or more in one tax year, the business is responsible for providing this income information to the workers and to the IRS on 1099 forms. In order to do proper reporting at the end of the year, a form W-9 should be collected from the payment recipient before the payment is made. If W-9 is not collected by the business, the business could be liable for backup withholdings of 30% of the payment.
For businesses, examples of nonemployee compensation requiring a Form 1099-NEC include payments to veterinarians, attorneys, accountants, tax advisors, mechanics, freight providers, and storage providers.
There are some exceptions. Some nonemployee income payments do not require a Form 1099. For example, payments to corporations generally are not reportable, except for medical and health care payments, and attorney fees (beware of how any LLC is being treated for tax). Also, land rental payments to real estate agents, and payments for hauling are not reportable.
When a payment includes both reportable and non-reportable items, what is the business to do? In certain situations, purchase of materials and supplies are subject to 1099- MISC reporting. For example, when an independent contractor who is not also a dealer in supplies performs work and provides the materials, (i.e., builds a fence) the entire payment must be recorded on Form 1099. If the payee normally deals in supplies, the business reports only the payment for services rendered, but not the value of the materials. When in doubt, issue the 1099.
Completion of Form 1099
A completed form must include the payer and payee name, address, and tax identification number. An individual tax identification number is provided by the payee on a W-9 form. If the payee fails to supply their social security number or other identification number, the business is required to withhold a federal income tax payment.
To order official IRS information returns, which include a scannable Copy A for filing with the IRS and all other applicable copies of the form, visit www.IRS.gov/orderforms. Click on Employer and Information Returns, and the IRS will mail you the forms you request and their instructions, as well as any publications you may order. Information returns may also be filed electronically using the IRS Filing Information Returns Electronically (FIRE) system (visit www.IRS.gov/FIRE) or the IRS Affordable Care Act Information Returns (AIR) program (visit www.IRS.gov/AIR).
If you are a recipient or payee of an Incorrect Form 1099-MISC contact the payor. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
Summary
Proper filing of information returns is more important than ever. The penalties have increased and the new leaders in government may be looking for revenue? Any business with questions concerning the submission of 1099 forms should consult with their tax advisor. If the payee fails to supply their social security number or other Federal identification number, the business is required to withhold a federal income tax payment. Your tax adviser should be able to help with your information return timely compliance. When in doubt issue the 1099.