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January 2015 Tip of the Month (1 of 2)

Wanna Forgetaboutit? IRS says... we don't think so!

1099 Memo to Business Clients and Friends of the Firm

We wanted to provide a reminder of the requirements to file 1099’s for all 2014 payments to unincorporated individuals and businesses of $600 or more (rents, services, prizes, attorney fees, etc)The IRS increasingly focuses its attention in this area, imposing penalties which otherwise might be avoided.

If you are looking to us to prepare any required 1099s, please forward us the required information as soon as possible so we can meet the required 1/31/15 filing date for distribution to those individuals & taxing authorities. Consider making a copy of this memo for your designated employee / bookkeeper.

All clients and friends of the firm are therefore strongly encouraged to consider the following:

  • Sending 1099 Forms is not optional, it’s the law. The various Forms 1099 (Abo and Company counted 16 at January 1, 2015) provide the means of reporting very specific income types from non-employment related sources that might not be captured elsewhere. If your business paid somebody (other than employees on payroll or for product purchases) the taxing authorities want to know about it. In fact, business income tax returns (that includes the 1040 for a sole proprietor) even include a question asking if Forms 1099 were filed as required with your signature, under penalty of perjury, certifying your response to be true.
  • First, you need to determine if you have a trade or business. If you are operating to make a gain or profit, you have a trade or business. If you run a nonprofit organization, a government agency, or a trust of a qualified pension or profit-sharing employer plan, such are considered trades or businesses for 1099 purposes. Last year the IRS made significant changes to the form 1099-MISC reporting requirements and expanded the types of payees and payments applicable. While the IRS might have previously abated the steep penalties, we’re advised such may not be the case now or in the future.

  • Thoroughly review all disbursements made from January 1, 2014 through December 31, 2014, summarizing all payments to unincorporated individuals and businesses where accumulated total is $600 or more.  You should make sure that you have the correct name, employer identification or social security number and address.  If you’re unable to confirm if a particular establishment is a corporation or not, issuing a 1099 might be a wise precaution.  

  • Beyond having to possibly subject yourself to the government auditor, if you fail to file a correct information return timely, you fail to include all information required to be on a return or you include incorrect information on a return, you can be subjected to an array of steep penalties if you cannot show reasonable cause. If the payee fails to furnish his or her taxpayer identification number (TIN), they are subject to backup withholding at a 28% rate. If you do not collect and pay backup withholding from affected payees as required, you may become liable for any uncollected amount. A good policy is to request every vendor to complete and provide a W-9 before you pay them. 

  • While we’re talking about W-9s, how’s this for a new year’s resolution from Abo and Company? Avoid the January runaround next year by starting a simple best practice today: before you make a payment for the first time to a new vendor, have them complete a Form W-9. It’s the best way to collect the information needed to determine, (a) if they need a 1099 and (b) how it should be issued. With the W-9 on file, you can eliminate the headaches of phone calls to individuals wary of giving you their social security number; avoid having to chase down independent contractors who moved (or don’t return phone calls) or having to wait on hold while someone at a vendor’s office tries to find someone there who knows what the federal identification number is.

  • Firms maintaining trust or escrow accounts need to review these disbursements as well. Payments frequently overlooked, where 1099s should be issued, include payments out of these trust accounts as well as disbursements for interest, rentals, contracted services (other than for employees), part-timers where W-2s are not required or issued, commissions, individuals performing plant maintenance or cleaning services, etc.  1099s are required for individuals, partnerships, an LLC, etc.  Do not think that just because a payment is made to a “company”, that it is a corporation.

  • Payments to attorneys for legal fees that amount to $600 or more should be reported in box 7 of form 1099-Misc.  Report in box 14 of that form payments or gross proceeds paid to an attorney, such as in a settlement agreement, unless the attorney's fees are reportable by you in box 7.  The exemption for payments to corporations does not apply to payments for legal services.

  • Many clients have followed our suggestion having 1099s prepared by in-house staff or payroll service bureaus to keep professional fees at a minimum.  Regardless, it is incumbent upon such firms to make sure that they still have someone review all 2014 expenditures since we’ve seen all too many types of payments go undetected.

  • Form 1096 is used to transmit the paper forms to the IRS by 3/2/2015 (or 3/31/15 if you are filing electronically). In our area, NJ and Pa require 1099s by then also. If you are unable to get 1099s out in time, an automatic 30-day extension is available by filing Form 8809.

  • If you fail to file a correct 1099 information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The penalty applies if you fail to file timely, you fail to include all information required to be shown on a 1099 return, or you include incorrect information on a return. The 1099 penalty also applies if you file on paper when you were required to file 1099s electronically, you report an incorrect TIN (Tax Identification Number) or fail to report a TIN, or you fail to file paper 1099 forms that are machine readable. The amount of the 1099 deadline penalty is based on when you file the correct information return.

Yep, Abo and Company thinks it’s worth repeating……

If you are looking to us to prepare any required 1099s, please forward us the required information as soon as possible so we can meet the required 1/31/15 filing date for distribution to those individuals & taxing authorities. Consider making a copy of this memo for your designated employee / bookkeeper.

Happy New Year and…..Many Happy Returns!