August 31, 2018
Author: Jason T. Dinesen
Organization: Dinesen Tax & Accounting, P.C.
I. The Whys and Whats of Filing
Why file a Form 1099? It’s the law – and the IRS is increasing enforcement in this area.
Who must issue a 1099? Generally, any business – regardless of its structure (sole proprietor, corporation, etc.) – that makes “reportable transactions” during the year must issue a 1099 to the recipient of income and to the IRS.
What constitutes a reportable transaction depends on the nature of the transaction. Here is a sampling of the reporting requirements for some of the popular types of Form 1099 that a typical business is likely to issue:
• Form 1099-DIV: an incorporated business may need to issue a Form 1099- DIV to shareholders if the business paid dividends of $10 or more to a shareholder.
• Form 1099-INT: issued for interest payments of $10 or more to an individual during the year. Note that, for lending institutions, the value of gifts given to people who open new accounts (tote bags, coffee mugs, etc.) must generally be included as an interest payment if the value of the gift is more than $10 for deposits of less than $5,000, and more than $20 for deposits of $5,000 or more.
• Form 1099-MISC must be issued for payments totaling $600 or more during the year to unincorporated independent contractors, or for payments of $600 in rent. The ins and outs of Form 1099-MISC will be discussed in much greater detail elsewhere in today’s presentation, though we will touch on a few issues in this segment.
• Form 1099-R: a business may need to issue a Form 1099-R if the business maintains a retirement plan and an employee (or ex-employee) withdraws money from a plan. In typical situations, the third-party administrator of the retirement plan will issue the 1099-R, but the responsibility for issuing the form ultimately lies with the employer.
Form 1099-MISC and Payments to Corporations
In general, a 1099-MISC need only be issued for payments made to unincorporated individuals or partnerships. Payments made to a corporation generally are not reportable on a 1099-MISC.
Note the use of the word “generally” in the previous paragraph. There are two exceptions to the “no 1099 to a corporation” rule.
1. Payments made to attorneys for legal services. Such payments must always be reported on a 1099-MISC, regardless of how the law firm is structured.
2. Payments made for medical services.
In regards to #2, the IRS released a Private Letter Ruling in October 2013 in which the IRS ruled that payments made to a veterinarian count as payments for “medical services.” So a business that pays a veterinarian would need to issue the veterinarian a 1099 even if the veterinarian is incorporated.
One important note to make on the “1099 to the veterinarian” rule is that this applies only to business transactions. Individuals who take the family pet to the vet don’t need to issue a 1099. But payments made by a business to a veterinarian (for example, farmers, pet stores, zoos, etc.) would need to be reported on a 1099.
Form 1099-MISC and Payments to Employees
In most circumstances, any payments that a business makes to its employees will not be reported on a 1099-MISC. Instead, if those payments need reported, they will be reported on the employee’s W-2.
However, a 1099-MISC may need to be issued if an employee dies during the year. The employer will need to issue a 1099-MISC to report accrued wages, vacation pay, etc. paid after the date of death. If payment is made in the same year the employee died, the employer must withhold Social Security and Medicare taxes on that payment and report that payment on the employee’s W-2 as Social Security and Medicare wages (boxes 3 and 5 of the W-2). The payment should not be shown in gross taxable wages (box 1 of the W-2).
A further discussion of payments to deceased employees is beyond the scope of today’s presentation.
Repeal of Certain Form 1099-MISC Requirements
The Patient Protection and Affordable Care Act was initially going to require a 1099-MISC to be issued to any business entity (including corporations) for any business related transactions, including purchases of supplies and other such transactions not typically thought of as being subject to the 1099-MISC rules.
Mercifully, Congress repealed this provision before it took effect. Therefore, the “old” rules of Form 1099-MISC continue to apply.
Rental Property Owners
Owners of rental property are generally required to issue 1099s under the same rules as for businesses.
II. When to File and How to File
There are two deadlines to keep track of:
1. All forms in the 1099 series must be issued to recipients by January 31.
2. All forms in the 1099 series must be issued to the IRS by February 28/29 if filing on paper, or by March 31 if e-filing.
Issuing 1099s to Recipients
Businesses must issue 1099s to recipients by January 31. There are 3 exceptions to this rule, where the deadline is February 15:
• Form 1099-B
• Form 1099-S
• Form 1099-MISC, but only if the payment being reported on Form 1099-MISC relates to Boxes 8 (substitute payments in lieu of dividends or interest) or 14 (gross proceeds paid to an attorney) In all other circumstances, the 1099 must be issued (meaning, at least postmarked) to recipients by January 31.
Issuing 1099s Electronically to Recipients
Can you e-mail or provide a 1099 by some other electronic means (such as a secure website) to a recipient? The answer is yes, but there are hoops you must jump through. Treasury Regulation 31.6051(j) provides highly technical rules:
• The recipient must consent to receiving the form electronically, and the consent must be given in a way that shows that he or she can access the file electronically. In other words, the recipient must provide consent by an e-mail response that shows they can access e-mail at that e-mail address.
• The issuer must notify the recipient of any hardware or software changes that could impact opening the file.
• Before furnishing the statements, the filer must provide the recipient with the following information:
o An acknowledgment that if the recipient doesn’t consent to receiving the statement electronically, that a paper copy will be provided.
o The duration of the consent (for example, whether the consent will apply for every year going forward, or only for the current year).
o How to obtain a paper copy even if they receive an electronic copy.
o How to withdraw consent.
o A statement of the conditions under which statements will no longer be furnished to the recipient.
o How the recipient can update their contact information.
o A description of any hardware or software requirements for accessing or printing the statement. If the statements are stored on a secure website, the issuer must also state when or if the statement will no longer be available on the website. In any event, the issuer must provide access to the statement through at least October 15 of that year.
Issuers can, if they choose, issue a 1099 on a statement other than the standard forms provided by the IRS. However, issuers are cautioned to consult IRS Publication 1179 for guidance to make sure that the substitute form meets basic IRS format and content requirements.
Extension of Time to Provide Statements to Recipients
Issuers can apply for an extension of time to provide statements to recipients by sending a written request to the IRS at:
Enterprise Computing Center
Martinsburg Information Reporting Program, ATTN: Extension of Time
240 Murall Drive
Kearneysville, WV 25430
The request must include the issuer’s name, employer identification number and address. It must also include a statement that shows what type(s) of forms need an extension and the reason for the delay.
If approved, the issuer will have a 30-day extension to issue the forms to recipients.
Filing With the IRS
The deadline for submitting copies of 1099s to the IRS is February 28/29 if mailing paper copies of the forms to the IRS. The deadline is March 31 if submitting forms electronically to the IRS.
Filers can get an automatic 30-day extension of time for submitting the forms to the IRS by filing Form 8809. No explanation needs to be given when filing this form, and the extension is automatically granted.
Form 1096, “Annual Summary and Transmittal of U.S. Information Returns” must also be submitted to the IRS by the filing deadline. Form 1096 summarizes all information forms submitted by the filer. One benefit of submitting 1099s electronically to the IRS is that Form 1096 does not need completed when e-filing.
If filing on paper, make sure to use the proper version of the forms. For example, forms printed off the IRS website generally cannot be filed with the IRS. You can provide a recipient with their copy of the 1099 based on a form you printed from the IRS website, but those forms cannot be sent to the IRS.
Forms that are acceptable to file with the IRS can be found at office-supply stores or can be ordered from the IRS.
The IRS accepts hand-written 1099s but the handwriting must be legible. If typing the 1099s, the IRS prefers Courier 12-point font.
When filling out the 1099, the IRS says to leave blank any box that doesn’t apply, rather than putting a 0 in the box.
All 1099s can be sent to the IRS on paper or electronically – but some filers must submit the forms electronically. The mandatory e-file requirement applies to any filer who file 250 or more “information returns.” The term “information return” refers to all of the various reporting forms that may need to be issued – W-2s, 1099s, 1098s, etc. This requirement can be confusing. The 250 threshold applies separately to each type of information return.
Example: ABC Company employs 251 employees and thus must issue 251 W-2s. Additionally, ABC must issue 200 Forms 1099-MISC. The e-filing requirement applies separately to each type of information return. So ABC would be required to e-file their W-2s but NOT the 1099-MISC forms.
Note that any filer can choose to file electronically, even if they’re not subject to the filing requirement. So in the example above, ABC could choose to e-file the 1099- MISC even though they’re not required to.
Corrections are treated as a separate type of information return:
Example: ABC Company must issue 255 Forms 1099-MISC and is required to e-file those forms because the number of forms is above 250. After filing these forms, ABC discovers that 10 of the forms need corrected. ABC could choose to file these corrected Forms 1099-MISC on paper because there are only 10 of them, which is far less than the 250 threshold.
Filers can apply for a hardship waiver to obtain an exemption from the e-filing requirement. The waiver is requested by filing Form 8508 at least 45 days before the due date of the information returns.
A waiver applies for one year at a time only, so filers will need to re-submit Form 8508 each year that they wish to obtain a waiver.
According to Treasury Regulations, the primary factor in determining whether or not a waiver will be granted is economic hardship. Indeed, the instructions to Form 8508 require the submission of two written estimates to show the estimated software costs or other preparation costs associated with e-filing.
How to E-file
There are many options available for e-filing 1099s with the IRS. Some bookkeeping or accounting software may handle e-filing for you. A variety of websites that are officially registered with the IRS can also e-file 1099s. Most of these websites allow for importing of data from an Excel spreadsheet or from accounting software.
There are many ways a filer of 1099s can face penalties. Let us count the ways:
1. If a correct return is not filed by the due date and the filer is unable to show reasonable cause for why.
2. Failure to file timely.
3. Failure to include all required information on the form.
4. Including incorrect information on the form. (A “de minimis” exception applies for mistakes that are corrected within a certain timeframe. We will discuss this exception shortly.)
5. Filing on paper when required to file electronically.
6. Reporting an incorrect taxpayer identification number (Social Security Number or Employer Identification Number)
The amount of the penalty depends on when the correct information is filed:
• The penalty is $30/form for returns correctly filed within 30 days after the original due date. The maximum penalty is $250,000/year for large businesses, or $75,000 for small businesses (defined, for these purposes, as a business with average gross receipts of $5 million or less in the prior three years).
• The penalty is $60/form for returns correctly filed more than 30 days after the /original due date but no later than August 1. The maximum penalty is $500,000/year ($200,000 for small businesses).
• The penalty is $100/form for returns filed after August 1 (or not filed at all). The maximum penalty is $1.5 million/year ($500,000 for small businesses). A separate penalty applies for not e-filing when you are required to e-file. That penalty is:
• $100/per return not e-filed, unless the filer can show reasonable cause for not efiling. NOTE: the penalty only applies to forms above the 250 threshold. For example, ABC Company files 260 Forms 1099-MISC on paper. Because 260 is more than 250, ABC was supposed to e-file. The $100/return penalty only applies to 10 of the 1099s – the number of 1099s in excess of the 250 threshold.
De Minimis Exception for Corrections or Small Errors
According to the IRS, one of the ways a filer can be penalized is for including “incorrect” information on a 1099. This would seem to indicate that any errors on a 1099 could lead to a penalty.
Happily, the IRS provides two common-sense exceptions that should help most filers avoid penalties for errors on 1099s.
1. “De Minimis” rule: no penalty applies if the errors are corrected by August 1 and the number of incorrect forms filed is less than: the greater of 10 forms or 0.5% of the total number of forms the filer filed that year. For example, ABC Company files 100 Forms 1099-MISC. They could have errors on 10 of those forms without owing a penalty (10 is larger than 0.5% of 100).
2. Inconsequential errors or omissions: no penalty applies if the error does not hinder the IRS’s ability to process the return. Certain errors are never considered inconsequential. Those errors are: incorrect Social Security Numbers or EINs; errors in a recipient’s last name; errors regarding dollar amounts.
-ABC Company misspells the word “Street” on a recipient’s address. This error is inconsequential and will not result in a penalty.
-ABC Company misspells the name “William” as “Willaim.” As long as William’s SSN and last name are correct, this error will be considered inconsequential and will not result in a penalty.
-ABC Company misspells the last name “Doe” as “Ode.” This error is not considered inconsequential and could result in a penalty against ABC.
Business tax returns now ask two questions:
1. Did the business make any payments that would require the issuance of a 1099- MISC? And,
2. If “yes,” did the business issue the forms?
The author believes these questions show clearly that the IRS will be increasing its enforcement of the 1099 rules in the years to come.