Taxpayers are now required to explicitly confirm their compliance with Form 1099 reporting when they make their annual tax filing. Failure to file on time can result in penalties of up to $100 per payee, with a maximum penalty of $1,500,000. If the failure to file is due to intentional disregard, the penalty is increased to $250 per payee, and there is no limit on the amount of the potential penalty. In addition, there could be an additional penalty of $250 per payee, for failure give the payee the required information return if intentional disregard is determined.
When are 1099 Forms required?
Taxpayers engaged in a trade or business are required to file Form 1099 to report certain types of payments made to U.S. non-exempt recipients (this includes partnerships and individuals) who are not partners or employees receiving W-2s (payments to foreign persons and foreign partners have separate reporting requirements).
Reporting is required for certain payments including interest, dividends, rents, royalties and payments for services, including independent contractors. If the total amount of payments made to a payee over a year equals $600 or more, the payer is required to file an information return (Form 1099) with the IRS. Some of the more common situations requiring reporting include:
- Management fees paid to management companies
- Interest payments (required if $10 or more)
- Legal and professional fees (including legal firms that are incorporated )
- C Corporate dividends
- Cancellation of debt income
- Prizes and awards
- Settlement proceeds paid to attorneys
- Services (including parts, materials and expense reimbursements, unless billed separately and paid direct to the vendor)
- Temporary help
- Contract labor
- Janitorial services
- Lawn maintenance and snow removal
- Accounting and other professional services
In general, reporting such payments is required if the recipient is not a corporation – for example, when the recipient is an individual, partnership, limited liability company treated as a partnership under federal tax rules or sole proprietorship. Payments made to attorneys in the course of a trade or business are required to be reported on Form 1099 regardless of whether the attorney is incorporated or not. Payments made to corporations are also required in the case of medical and health care payments. Credit card companies and similar businesses must report the annual gross dollar amount of payment card transactions settled for each of their merchant payees.
When are information returns due?
Information returns must be provided to taxpayers by January 31, 2014, reporting income for the previous calendar year, regardless of the businesses’ year-end. Filing with the IRS is due by February 28, 2014 (or March 31, 2014, if filed electronically). In addition to information about the return prepare and payee, the returns must include the recipient’s social security number or Federal EIN, which can be supplied on IRS Form W-9 (Request of Taxpayer identification Number and Certification) see attached copy. If a payee is not willing to provide this number, you can withhold 28 percent of the invoice amount as backup withholding and submit it to the IRS. The vendor would then have to report income to the IRS in order to claim a refund of the money withheld.
For more information, please contact BerganKDV Accounting Services Manager, Kristie Revering, or visit our Outsourced Accounting Services page.