Tax Information Reporting
It is that time of year again to prepare your require government tax reporting forms. Your income tax return is the big one, but the information returns must be filed first. The due date for furnishing the forms to recipients is generally January 31, but some forms may have a different furnishing due date depending on the character of transactions. The most numerous of these filings are the W-2 employee wage forms and the 1099-NEC nonemployee payments. However, there are at least 22 different variations of forms 1099 and 1098. The scary thing is that there are penalties for failure to file these forms correctly and they can accumulate quickly. All may not be lost, because the maximum penalty is only $3,426,000 for a large business and $1,142,000 for small businesses if the business does not intentionally fail to file. Sarcasm aside, those penalties could be devastating. These caps do not even include any possible backup reporting liabilities. Actions by you, including backup withholding, are required when an individual refuses to provide their information to you as required for a proper 1099 filing. It could be very expensive to have sloppy record keeping in this part of your business.
Forms Possibly Required
If during the calendar year your business made reportable payments, you are required to file W-2 and 1099-NEC information returns to the payee and IRS by February 1, 2022. The other Forms are generally due by the end of February to the payee along with the paper filing to the IRS. The electronic filing to the IRS for these other forms is due by the end of March. It is important to file the appropriate information return timely for each type of payment you make in the course of your trade or business:
W-2 for employee wages
Form 1099-NEC Beginning last year, employers must use Form 1099-NEC to report nonemployee compensation instead of Form 1099-MISC
Form 1099-MISC use the proper box to report $10 or more in royalties or broker payments or $600 or more for Rents (Box 1), Royalties (Box 2), Other income (Box 3), including prizes and awards, Federal income tax withheld (Box 4) including backup withholding, Fishing boat proceeds (Box 5), Medical and health care services (Box 6), Substitute payments in lieu of dividends or interest (Box 8), Crop insurance proceeds (Box 9), Gross proceeds paid to an attorney for example in a settlement agreement (Box 10, but payments to attorneys for services are reported on Form 1099-NEC), Fish purchased for resale (Box 11), Section 409A deferrals (Box 12), Excess golden parachute payments (Box 13) and Nonqualified deferred compensation (Box 14) It is important that you place the payment in the proper box on the form.
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
Form 1042-S payments to Foreign Person’s subject to withholding (should receive a W-8 or W-8BEN from the payee)
If, as part of your trade or business, you received any of the following types of payments, file appropriate information returns 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 Broker and barter transactions for an S corporation or a broker sold a covered security belonging to his 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. The USDA reports program payments such as CRP payments to the IRS. It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). If you, as the payee of record, receive a program payment belonging to someone else, such as your land owner, the amount belonging to the other person is a nominee distribution. You should file Form 1099-G to report the identity of the actual recipient to the IRS. You should also give this information to the recipient. You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form.
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 in the correct place on that form is as important.
Form 1099-NEC
Beginning last year trades and businesses 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 (“NEC”):
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 cumulative payments to the payee of at least $600 during the year.
Ranchers regularly pay for services performed by individuals who are not their fulltime employees. For ranchers, typical nonemployee compensation requiring a Form 1099-NEC include payments to veterinarians, attorneys, accountants, tax advisors, cowboys, mechanics, custom harvesters, chemical and fertilizer applicators. When the sum of all payments made to a person or unincorporated business is $600 or more in one tax year, the rancher is responsible for providing this income information to the workers and to the IRS. In order to do proper reporting at the end of the year, a form W-9 (or W-8 if foreign) should have been collected from the payment recipient before the payment is made. If W-9 is not collected by the rancher, the rancher should do backup withholding of 30% of the payment or he could end up being assessed that amount in an IRS audit.
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 the LLC is being treated for tax). Also, land rental payments to real estate agents, and payments for hauling grain and livestock are not reportable. Other ranch-related expenses that do not require a Form 1099 include feed, seed, fertilizer, chemicals, fuel, and other non-service items.
When a payment includes both reportable and non-reportable items, what is the reporting requirement? In certain situations, purchase of materials and supplies are subject to Form 1099 reporting. For example, when an independent contractor who is not also a dealer in supplies performs work and provides the materials, (for example, builds a fence) the entire payment must be recorded on Form 1099. However, if the payee normally deals in supplies, you would only report the payment for services rendered, but not the value of the materials. When in doubt issue the 1099 – there is no penalty for over-reporting information.
A completed information form must include the payer (your business’s) and payee (service provider’s) 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 federal identification number), the payer is required to withhold a federal income tax from the gross payment. If 250 or more forms are to be filed, they must be filed electronically.
Note 1099 forms can be ordered from the IRS at http://www.irs.gov/Businesses/Online-Ordering-for-Information-Returns-and-Employer-Returns. If you are a recipient 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.
Penalties
There is a safe harbor for de minimis dollar amount errors on information returns and payee statements.
If dollar amounts are incorrect on an information return filed with the IRS or on a payee statement furnished to a recipient, no correction of the dollar amount shall be required, and the return shall be treated as having been filed or the payee statement furnished as correct if:
The difference between the dollar amount reported on the filed return or furnished payee statement and the correct amount is no more than $100, and
The difference between the dollar amount reported for tax withheld on the filed return or furnished payee statement and the correct amount is no more than $25.
This safe harbor provision shall not apply if a recipient requests a corrected statement. In that case, a corrected return must be filed with the IRS and a corrected payee statement furnished to the recipient. These limits are small so care should be exercise in the preparation of these forms.
The revised penalty for intentional disregard to the reporting requirement is at $570 per payee statement with no maximum penalty. A rancher should not ignore these filing requirements. Late and or incorrect filing penalties increase as follows:
$50 per information return if you correctly file within 30 days of the February 1; maximum penalty $571,000 per year ($199,500 for small businesses)
$110 per information return if you correctly file more than 30 days after the February 1, but by August 1; maximum penalty $1,713,000 per year ($571,000 for small businesses)
$280 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,426,000 per year ($1,142,000 for small businesses)
Summary
Proper filing of information returns is more important than ever. There are nuances regarding due dates, what forms to file, how to complete specific forms, and what to do regarding missing or incorrect payee information. Your tax adviser should be able to help with timely compliance. When in doubt, file the form.