By Emily Pina, CPA
Did your business make any payments that would require it to file Form(s) 1099 and if so, did you file all required forms? In 2011, the Internal Revenue Service included these two new questions on business tax returns including Forms 1120 for corporations, 1120S for S-corporations and 1065 for partnerships. The questions also appeared on the following schedules of Form 1040 for individuals: Schedule C for sole proprietors, Schedule E for rental activities, and Schedule F for farming activities. For some businesses, these questions may have come as a surprise. The IRS is not asking these questions because of a change in the filing requirements; the questions have been included to add emphasis to the already existing requirements. The most common Form 1099 filed by small businesses is Form 1099-MISC.
In order to answer these questions you must first understand the purpose and filing requirements for Form 1099-MISC. Form 1099-MISC is an information report used to communicate certain types of payments made in the course of a trade or business. These forms must be submitted to both the IRS and the person or business that you paid. This reporting provides the government with a record of the income earned by the recipients. Recently legislators have added additional emphasis on the need for complete and accurate 1099 reporting to aid in closing the tax gap. The tax gap is the difference between the tax liability for a given tax year and the amount that is paid on time. As a result of the increased scrutiny on this issue it is important for businesses to review the 1099 filing requirements to ensure they are compliant.
A 1099-MISC is generally required to be issued for payments to persons, vendors, subcontractors, independent contractors, and others for (1) $600 or more per year paid for services (including parts and materials), rents, prizes and awards, medical care and health care payments (excluding health insurance), crop insurance proceeds, cash payments to fishermen, payments from a notional principal contract to an individual, partnership or estate, and proceeds paid to attorneys (2) $10 or more per year paid in royalties or for broker payments in lieu of dividends or tax-exempt interest and (3) any fishing boat proceeds. Reporting such payments is generally not required if the recipient of the payment is a corporation, however, payments made to corporations require the issuance of a 1099 when they are made for medical and health care or for legal fees paid to attorneys.
You must provide the recipient with their copy of the Form 1099-MISC by January 31 for the amount paid for the previous calendar year. A copy of the form must be mailed to the IRS by February 28 or electronically filed by March 31. Failure to file the forms by the deadline will result in penalties.
The penalties for late and non-filers have recently increased, making failure to comply with the fi ling requirements very costly. The penalties for late filing range from $30-$100 per form, depending on how late the form is filed. It is important to note that the copy of the 1099 provided to the recipient and the 1099 provided to the IRS are considered two separate forms. This means for every 1099-MISC that is not issued timely the penalties due are doubled and result in an actual range from $60-$200. If you intentionally disregard your fi ling obligation, the penalty is $250 per form, resulting in a $500 penalty for failure to issue the 1099 to the recipient and the IRS. Starting in 2012, these penalties will be adjusted annually for inflation.
In order to comply with the filing requirements and avoid the costly penalties you should request that your vendors, contractors and other payment recipients submit to you a Form W-9, Request for Taxpayer Identification Number and Certification, prior to paying them. The W-9 provides you with the legal name, address and taxpayer identification number of the vendor. This information will be needed when preparing any 1099-MISC forms. Although this requires more paperwork, this procedure should be relatively easy to implement. Next, your bookkeeping system needs to be set up to allow you to track the exact amount paid to each 1099-MISC recipient for the year. This may be more difficult to achieve depending on the current system you have in place. Most electronic accounting software packages have reporting options available to allow you to effortlessly generate this information.
The IRS has the same filing requirements for Form 1099-MISC no matter what size your trade or business is; the rules are the same for the largest multi-million dollar corporation down to the sole proprietor operating out of their home. Even nonprofit organizations are subject to these filing requirements. Many very small trade or business operations, such as a couple who rent out their second home, may have never even considered that these filing requirements applied to them. The IRS has made it clear by placing these questions not only on the business returns, but also the schedules included in the individual returns, that they are increasing the degree of scrutiny across the board for all levels of business. For the smallest businesses these penalties could have the greatest negative impact. For this reason is important for all business owners to become familiar with the reporting requirements and consult with a tax professional in any instances of uncertainty.
It is easy to understand why the IRS is enhancing its enforcement of the proper issuance of Form 1099-MISC for all the appropriate payment recipients. Implementing the necessary steps to become compliant with the Form 1099-MISC filing requirements, although an added burden, will help your business avoid the harsh penalties being imposed. Now that you know the purpose of the form and its filing requirements, your business will be able to answer the new IRS questions with confidence on your 2012 tax returns.
Emily Pina, CPA, is an Accountant & Audit Manager at Malloy, Lynch, Bienvenue, LLP. She can be reached at (781) 871-5850 or EPina@mlbcpa.net.
Published in Cape & Plymouth Business July 2012
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