Nobody Likes 1099s...Ya Just Gotta Deal with 'em!
1099 ALERT TO BUSINESS CLIENTS AND FRIENDS OF THE FIRM
1099 FORMS ARE NOT OPTIONAL - THEY'RE REQUIRED BY LAW
We wanted to provide this reminder to ensure that you meet your obligation for all 2018 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 for failing to file correct information returns have more than doubled in the last two years alone while employers, simple schedule Cs and even single property landlords are facing intense new scrutiny of their 1099s to prevent under-reporting by independent contractors. Failure to file the form for 2018 could result in a penalty that could be as much as $1,000 per each omitted.
The filing deadline for 2018 W-2s and 1099 forms is January 31, 2019. To cut down tax fraud, many states have moved up the filing deadline, as well. If you are reporting gross proceeds to an attorney the due date is February 15, 2019.
If you are looking to us to prepare any required 1099s, you must let us know and forward the required information as soon as possible. You really should try to get your bookkeeping done by 1/15/2019 to allow enough time to complete and have the 1099s reviewed so you can meet the required January 31, 2019 filing deadline for distribution to those individuals (and then to the taxing authorities).
Consider making a copy of this memo for your employee/bookkeeper
We strongly encourage our business clients, nonprofit organizations, rental property owners, clients filing a Schedule a C and other such friends of the firm to consider the following:
• 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.
• 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.
• Do not send a 1099-MISC to an employee since that is what a W-2 is for.
• 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.
• Do not send a 1099 to someone you’ve paid by credit card, debit card or by services like PayPal. Such payments will be embodied in a 1099K that they will receive from their merchant services provider.
• Review all disbursements made from January 1, 2018 through December 31, 2018, 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 but we suspect most LLCs will require the issuance of 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 non-accountable 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 non-employee 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 all 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. Don’t assume 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 individuals or enterprises should make sure that they still have someone (like us) review all 2018 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 hire a non-U.S. citizen who works remotely via the Internet from another country, generally speaking, you do not need to file a 1099 for that person. However, if the foreign worker performs any work inside the United States, you would need to file the 1099. It is your responsibility to verify that the worker (1) is indeed a non-U.S. citizen, and (2) performed all work outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return to you Form W-8BEN.
• A payer who later discovers an error should re-issue a corrected 1099 form to that payee, and correct the filing with the IRS. If you are a payee, be sure to review every 1099 you receive against your own records. This is for a couple of reasons: The payer may have made a mistake, such as the wrong amount. If so, contact the payer and ask to have the 1099-MISC form corrected and reissued. Or, your company could be a victim of identity fraud.
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.