The new year brings more changes to the requirements for filing 1099s. Along with these changes, the IRS has also added additional penalties. We urge all our clients to adopt and implement strategies now, before the end of the year, to enable you to comply with the tighter deadlines. Developing a strategy now will provide efficiencies going forward for preparing or providing the information to have 1099s prepared.
Here is a summary of 1099 basics, rules and best practices:
- The 1099 form that business owners are most concerned with is Form 1099-MISC, other 1099s include; 1099-INT for interest income and 1099-DIV for dividend income
- Form 1099-MISC is most commonly used for reporting payments to non-employee service providers made in the course of your trade or business
Who should receive a 1099-MISC for non-employee service payments?
Any person, partnership or LLC whom you have paid over the course of the year:
- $600 or more in services (including materials and parts if these were incidental to providing the service), rents, prizes and awards, other income payments and medical and health payments
- Payments of $600 or more paid to your attorney or law firm (report in box 7 unless it is a settlement agreement where gross proceeds were paid, then report that amount in box 14)
- $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest
Additionally there are special rules regarding fishermen and farmers, please refer to the IRS instructions.
Keep in mind there are also exceptions from this filing requirement, the most common ones include:
- Payments made to corporations, S-Corporations or LLCs taxed as corporations or S-Corps (unless these entities are medical/health payments or payments to attorneys or law firms)
- Payments for merchandise, telegrams, telephone, freight and payments to tax exempt organizations
- Payments of rent to real estate agents
Deadlines for 1099s (Note this is a significant change)
- January 31: 1099s must be provided to the party you paid by this date
- January 31: 1099 MISC must be sent to the IRS (if it includes nonemployee compensation in box box 7) - Note this change from previous years when the old deadline was February 28 if sending to the IRS by mail
- February 28: all other type 1099s must be sent to the IRS if sending by mail
- March 31: If filing the other type 1099s (non-1099 MISC) electronically, must send to IRS by this date (note if you file over 250 forms you must e-file)
Penalties for not filing on time are severe and will increase with the 2016 filing year due in 2017. Penalties are up to $260 per 1099 Form and will be assessed if you:
- Fail to provide the statement by January 31
- Fail to include all information required to be shown on the statement
- You include incorrect information on the statement. If any failure to file a correct information return is due to intentional disregard of the requirement to file, the penalty increases to $530 per return (1099/1096)
Best Practice Considerations to comply with IRS 1099 regulations:
- Require new vendor/contractors to complete Form W-9 whenever you begin a new working relationship and keep it on file. Consider implementing a policy requiring Form W-9 to be on file before payments to vendors can be issued. Form W-9 is an informational form that is issued between business parties. It is not filed with the IRS. Form W-9 allows you to determine to whom you must issue 1099s and provides all of the applicable information you need to prepare them including the entity type which would indicate whether the corporation exemption would apply.
- Ensure that all W-9s have been received for existing vendors/contractors. It is recommended to review your vendors with whom you have done business in the past year and require that they complete a new W-9. This can be done by mail, e-mail or fax, whichever method makes the process easiest for your vendors. Once the W-9 is received be sure to update the appropriate information in your software, keep the completed W-9s on file.
- If a notice is received for missing or incorrect information on the 1099 and the 1099 is not corrected by you, the IRS will require backup withholding at the rate of 28%.
- Use the IRS Taxpayer Identification Number (TIN) Matching Program to ensure that the TIN provided on the Form W-9 is correct. If a discrepancy is found, notify the vendor immediately to resolve the issue prior to the filing of the year end Forms 1099-MISC. For instructions to sign up for the program, visit the Taxpayer Identification Number Matching Program website.
- Adopt an internal written Form 1099-MISC policy which includes the IRS rules and regulations. Include in it the policy “When in doubt, send one out” to be conservative.
- If you are filing your 1099s by mail, you will also be required to file Form 1096, which provides the IRS with how many of each type of 1099 you are issuing and the total amount of those 1099s. If you are preparing your own 1099s (and 1096s) you must get the forms from an office supply store, or call 1-800-TAX-FORM, or visit the IRS online ordering information page (Note: these forms are not able to be printed from the IRS website). https://www.irs.gov/businesses/online-ordering-for-information-returns-and-employer-returns
- Check your software programs now for a way to designate potential 1099 recipients. Many, including Quickbooks, have a way to designate potential 1099 recipients. In Quickbooks, it’s as easy as checking a box on each vendor’s profile in the Vendor List and mapping the appropriate accounts that contain service related or other appropriate payments. If you keep track of individual vendors in your accounting software, it is a quick and easy way to remember who to provide a 1099 in January.
- States have different filing requirements, be sure to check the requirements for filing in each state in which you do business.
For our clients who have RubinBrown prepare their 1099s, complete information must be sent to us in the first week to 10 days of January to ensure timely filing. W-9s should be sent to us for the applicable vendors to ensure proper reporting.
If you have further questions please contact one of RubinBrown’s Entrepreneurial Services Group professionals.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
All Entrepreneurial News Entrepreneurial Services