Starting in the early 1980s, the IRS started matching the forms 1099 it receives against the individual tax returns that are filed by taxpayers. Form 1099 (along with Form W-2) is the primary means by which the IRS verifies that taxpayers are reporting their income. The IRS can assess substantial penalties against businesses (payers) who don't file Forms 1099 as required, or who file incorrect 1099 forms. So if you are a business owner, it pays to learn the requirements and incorporate them into your accounting systems--and document your compliance.
When it's a requirementIf the following four conditions are met, you must report a payment as non-employee compensation on IRS Form 1099.
1. You made the payment to someone who is not your employee.
2. You made the payment for services in the course of your trade or business.
3. You made the payment to an individual, partnership, estate or, in some cases, a corporation.
4. You made payments at the payee of at least $600 during the year. These payments are for services provided to you in the course of your business. You are generally not required to report payments to corporations unless the corporation is a law firm or medical services corporation.
The following are some examples of payments that should be reported to the IRS on Form 1099.
1. Professional service fees, including fees to attorneys (including corporations), accountants and architects.
2. Fees paid by one professional to another, including fee splitting or referral fees.
3. Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service.
4. A fee paid to a non-employee, including an independent contractor, or travel reimbursement for which the non-employee did not account to you, if the fee and reimbursement total at least $600. To help you determine whether someone is an independent contractor or an employee, see IRS publication 15-A.
Form W-9Form W-9 can assist you in fulfilling your Form 1099 obligations. This form, which is completed by a vendor or anyone else to whom you make payment, secures from your vendors the necessary information to assist you in your Form 1099 determination process. This includes the correct business name, address, type of business and Taxpayer Identification Number. Obtaining a vendor's correct TIN is crucial to the accurate completion of form 1099.
Some errors are commonly made on form W-9.
1. Payee (vendor) has an Employer Identification Number and the person who completes the Form 1099 for your company mistakenly assumes the payee is a corporation, and is not subject to 1099 reporting.
2. The payee is not incorporated, but gives you an EIN and you erroneously assume that the payee is a corporation that is exempt from 1099 reporting.
3. The Form W-9 information is wrong, perhaps because the recipient's business name on the Form 1099 is not the same as the name used to get his or her TIN.
For a corporation to be treated as exempt from Form 1099 information reporting, the corporation should complete a Form W-9 and provide it to you. If you're not certain of corporate status and you do send a Form 1099 to a corporation, it does no harm since you are stating the true fact that a payment was made.
Learning the hard wayWhat could happen to you if you're not careful?
V&V Construction (a partnership) was engaged in the business of remodeling small commercial and residential products. Subcontractors performed most of the remodeling work done by V&V. Prior to engaging a subcontractor for a project, V&V would mail the subcontractor a form letter asking the subcontractor to provide the information necessary to file a form 1099s with the IRS. Accompanying the letter was a form W-9, "request for taxpayer identification number and certification."
Unfortunately, V&V wasn't very diligent about following up with its subcontractors, and many of them failed to complete and return the W-9 form. Obtaining Form W-9 from a subcontractor with whom you do business is the only way to get the subcontractor's TIN. That number is crucial to the accurate completion of the 1099 form. Without the TIN, the IRS can't make much use of a 1099 form that's submitted to it. It doesn?t have the information it needs to ensure that the payee has filed an income tax return.
In 1989, an IRS agent, John Lee, was assigned to examine the tax returns of V&V for 1988, 1989 and 1990. Lee verified that V&V had not filed any 1099 forms in connection with payments made to its subcontractors and independent contractors for services rendered during the 1988 to 1990 period. Lee requested that V&V submit 1099 forms to him for each subcontractor for these three years. Most of the requested 1099 forms were submitted to Lee, but Lee determined that the 1099 forms had not actually been filed with the IRS, so he imposed a penalty against V&V for failing to file these forms. He also determined that V&V should have "backup withheld" a percentage of the payments it made to the 12 subcontractors from 1988 to 1990.
Backup withholding is required for people who have not furnished their TINs to you. The amount that must be withheld from a payment that is subject to backup withholding has recently been reduced from 31 percent to 30.5 percent. The new 30.5-percent backup-withholding rate is effective for payments made after Aug. 6, 2001.
V&V appealed Lee's assessment to the IRS Appeals Office. During the appeal, it was established that 12 of the subcontractors who did work for V&V received payments in excess of $600 per year, which meant that a Form 1099 should have been filed for each of them. V&V requested the IRS to not penalize it for failure to enforce backup income tax withholding for each of the 12 subcontractors, contending that each of the subcontractors had paid its income taxes. Among the information submitted by V&V to the appeals officer were three forms submitted by a subcontractor--J.B. Johnson--in which he claimed that the amounts he received from V&V were reported on his personal tax return for the years 1988, 1989 and 1990.
Try and tryHowever, in an earlier U.S. Tax Court trial of V&V for income-tax deficiencies, Johnson testified that he never reported the amount received from V&V in 1988, 1989 and 1990, and IRS records showed that Johnson had not even filed a tax return for the years 1988 through 1990. On the basis of this information, the appeals officer rejected Johnson's statement, and ruled that V&V was liable for the withholding tax on the amounts paid to Johnson during 1988, 1989 and 1990. The amounts were $1,513.60, $7,200 and $800, respectively.
V&V was also held liable for penalties and interest computed on the aggregate amounts of the payments that V&V made to the 12 subcontractors during each of the years in question. In addition, a penalty was assessed against V&V for failing to comply with the requirement to file 941 forms and submit withheld taxes during the years in question. And negligence penalty was also assessed against V&V. The penalties and interest on the penalties assessed against V&V totaled $75,868.96.
Although V&V complained bitterly and appealed from one court to the next, its appeal fell on deaf ears. The courts ruled that penalties and interest were due regardless of whether the 12 contractors paid their income tax or not. That's because V&V couldn't know whether the 12 subcontractors would pay their taxes. That's precisely why the IRS wants companies like V&V to file Form 1099. Form 1099 enables the IRS to ensure that a contractor who receives payments reports these payments on its income tax return.
DeadlinesForm 1099 for Tax Year 2001 must be distributed to the recipients by Jan. 31, 2002.
Deadlines for filing Forms 1099 for Tax Year 2001 depend on the method you select for sending your information to the IRS.
Electronically: April 1, 2002. An extension of 30 additional days (to May 1, 2002) can often be obtained by filling out Form 8809 and sending it to the IRS Martinsburg Computing Center prior to your deadline date.
Magnetic media: Feb. 28, 2002. If you file 250 or more information returns of one type, you must file using magnetic media (saving your data on tape or disk and sending that to the IRS).
Paper Copy A: Feb. 28, 2002.
Thirty-day extensions of the magnetic-media and paper-filing deadlines can also often be obtained with Form 8809.