Call Us: (856)222-4723

January 2018 Tip of the Month (1 of 2)

1099 forms are not optional - they're required by law

We wanted to provide this reminder to ensure you meet this obligation for all 2017 payments to unincorporated individuals and businesses of $600 or more (rents, services, prizes, attorney fees, etc.). The IRS is increasingly focusing their attention in this area since it is the agency's main weapon against under reporting of income. Penalties and audit risk can be avoided with proper filing. 

The filing deadline for 2017 W-2s and 1099 forms is January 31, 2018 (including Form 1099-MISC reporting non-employee compensation such as payments to independent contractors). To cut down tax fraud, many states have moved up the filing deadline, as well.

If you are looking to us to prepare any required 1099s, please forward the required information as soon as possible so we can help you meet the required January 31, 2018 filing deadline for distribution to those individuals (and then to the taxing authorities).

Consider making a copy of this memo for your designated employee / bookkeeper.

We strongly encourage our business clients, nonprofit organizations, rental property owners, clients filing a Schedule a C / C-EZ and other such friends of the firm to consider the following:

* Sending 1099 forms is not optional, it is the law. The various Forms 1099 provide the means of reporting very specific income types from non-employment related sources that might not be captured elsewhere. If you or your trade or business paid someone (other than employees on payroll or for product purchases) the taxing authorities want to know about it. 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.

* Send no 1099-misc to an employee since that is what a W-2 is for.

* First, you must determine if you have a trade or business. If you are operating to make a gain or profit, even solely as an independent contractor, 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 trades or businesses for 1099 purposes. While the IRS might have previously abated the steep penalties, we're advised such may not be the case.

* Do not send a 1099-MISC to someone when you have made a personal payment to him or her. An independent contractor to whom you have made a personal payment unrelated to your "trade or business' doesn't receive a 1099. Similarly, do not send a 1099 to someone you've paid by credit card. Such payments will be embodied in a 1099K they will receive from their merchant services provider.

* Review all disbursements made from January 1, 2017 through December 31, 2017, summarizing all payments to unincorporated individuals and businesses where the accumulated total is $600 or more. Nonprofit organizations are considered engaged in a trade or business and are subject to these reporting requirements. LLCs that elect to be treated as an S or C Corporation need not be issued 1099s. 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 face a government audit, if you fail to file the correct information by the deadline, fail to include all the required information on a return, or if you include incorrect information, 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.

* Do not use Form 1099-MISC to report employee business expense reimbursements. Report payments made to employees under a nonaccountable plan as wages on Form W-2.

* A good accounting policy is to require every vendor to complete and provide a W-9 before you pay them. This is the best way to collect the information 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 hassles 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 track down a federal identification number. (Sound familiar? We suggested doing this at the beginning of last year, as well).

* You must report Directors' Fees and other remuneration, including payments made after retirement, on Form 1099-MISC in the year paid. Report them in Box 7.

* Firms maintaining trust or escrow accounts must review these disbursements. Payments frequently overlooked--where 1099s should be issued-- include payments out of these trust accounts and 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. Forms 1099 are required for individuals, partnerships, LLCs, etc. Do not assume that just because a payment is made to a "company," that it is a corporation.

* Involved with as many lawyers and law firms as we are, we've seen confusion abound in this arena. We're not trying to frighten you, but did you know that the IRS has a special manual which deals exclusively with auditing lawyers (call us separately to so discuss)? Well, straight from the IRS audit guide specifically dealing with attorneys, is their focus on lawyers not issuing 1099s to independent contractors (like experts from Abo Cipolla Financial Forensics, LLC) out of an attorney's trust account. The argument that the funds belonged to the contractor will not relieve the attorney from this reporting responsibility. 1099s are also required to be filed for payments to recipients of lawsuits unless specifically exempt from taxation (another reason to call us).

* The exemption for payments to corporations does not apply to payments for legal services. Payments to attorneys for legal fees that amount to $600 or more should be reported in Box 7 of Form 1099-Misc, even if the attorney is incorporated. 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.

* Many clients have followed our suggestion of having 1099s prepared by in-house staff or payroll service bureaus to keep our professional fees at a minimum. Regardless, such firms must make sure that they still have someone (like us) review all 2017 expenditures since we have seen far too many types of payments go undetected (and often well beyond the proper due date for reporting).

* Generally, amounts reported in Box 7 are subject to self-employment tax. If payments to individuals are not subject to this tax and are not reportable elsewhere on Form 1099-MISC, report such payments in Box 3.

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. Again, the penalty applies if you miss the filing deadline or fail to provide complete and / or correct information on the 1099. The 1099 penalty also applies if you file on paper when you had to file electronically or your 1099 paper forms are not machine readable. Additionally, penalties may apply if you fail to report or include a correct TIN (Tax Identification Number). The 1099 deadline penalty is based on when you file the correct information return.