ABC Taxes, Tips & Tools

4/14/2011 Update: Repealed. On April 14, 2011 Pres­i­dent Obama signed the Com­pre­hen­sive 1099 Tax­payer Pro­tec­tion and Repay­ment of Exchange Sub­sidy Over­pay­ments Act of 2011 into law.  It repealed the expanded 1099 infor­ma­tion report­ing require­ments that were included in the Patient Pro­tec­tion and Afford­able Care Act. Here is the leg­isla­tive sum­mary, “Amends the Inter­nal Rev­enue Code to: (1) repeal require­ments for the report­ing to the Inter­nal Rev­enue Ser­vice (IRS) of pay­ments of $600 or more to cor­po­ra­tions that are not tax-exempt and of gross pro­ceeds paid in con­sid­er­a­tion for any type of prop­erty; (2) repeal require­ments for report­ing pay­ments made with respect to rental prop­erty which is not part of a trade or busi­ness; and (3) increase, for tax­able years end­ing after Decem­ber 31, 2013, the advance applic­a­ble dol­lar amount of the tax credit for health care pre­mium assis­tance for tax­pay­ers whose house­hold income is less than 400% of the poverty line. “- source govtrack.us.

It would appear who a busi­ness has to issue a 1099-MISC to goes back to the way it was before. FYI The Way It Was Before: Pay­ments made by a trade or busi­ness, includ­ing non­profit orga­ni­za­tions, tax­able farm­ers coop­er­a­tives, gov­ern­ment agen­cies, trusts of qual­i­fied pen­sion or profit-sharing employer plans, of $600 or more in pay­ments per year for

• non-employee ser­vices & goods inci­dent to pro­vid­ing those ser­vices e.g. a auto shop repairs a busi­ness vehi­cle, the total pay­ment is reportable as the parts are inci­dent to the repair service,
• the Fair Mar­ket Value of bar­ter­ing exchanges for busi­ness related ser­vices & mate­ri­als inci­dent to those ser­vices, between busi­nesses, and/or indi­vid­u­als involved in a trade or busi­ness e.g a painter and a lawyer exchange ser­vices, where the lawyer got his office painted, and the painter gets a boil­er­plate con­tract com­posed.  How­ever if the lawyer assisted in the painter’s divorce then pay­ment via bartered ser­vice pro­vided by the painter is per­sonal & not involved in trade or business-the lawyer would issue a 1099-MISC, but the painter would not…
• non-employee pro­fes­sional fees, e.g. fees paid to a doc­tor, lawyer, etc.,
• rent,
• non-employee awards, & prizes, which need not be related to ser­vices received, e.g. the Fair Mar­ket Value of a prize won on a game show,
• non-employee bonuses, taxable fringe ben­e­fits & other allowances,
• non-employee reim­burse­ments such as car, fees, mileage and other non-employee expenses,
• non-employee com­mis­sions, includ­ing golden para­chute payments,
• pay­ments made to a non-employee’s estate,
• pay­ments made to rent coin oper­ated amusements,
• dam­ages, includ­ing puni­tive damages,
• deferred non-employee compensation,
• direc­tors fees,
• fish boat crew payments,
• Indian gam­ing prof­its paid to tribal members,
• pay­ments made to experts and other wit­nesses in legal proceedings,
• OR pay­ments of more than $10 per year in royalties,
• OR sales by a busi­ness of $5,000 or more per year of con­sumer prod­ucts to a per­son on a buy-sell, deposit-commission, or other com­mis­sion basis for resale (by the buyer or any other per­son) any­where other than in a per­ma­nent retail establishment,

is required.  The 1099-MISC infor­ma­tion report­ing require­ment is for com­pen­sa­tion paid to indi­vid­u­als and non-incorporated busi­nesses. Infor­ma­tion report­ing for pay­ments made to cor­po­ra­tions for med­ical, health care & legal ser­vices as well as those for fish­ing activ­i­ties is required; most other cor­po­ra­tions are exempt from 1099-MISC infor­ma­tion report­ing. Per­sonal pay­ments are not reported, only those involved in trade or busi­ness.  Employ­ees, includ­ing house­hold employ­ees & statu­tory employ­ees, do not get 1099s, they get W-2s. The pre­ced­ing list is not nec­es­sar­ily com­pre­hen­sive and does not include instruc­tions on how to pre­pare the 1099-MISC, merely is to advise the reader of sit­u­a­tions in which a 1099-MISC is likely required.

12/14/2010 Update: Land­lords beware. Unless your rental income derives pri­mar­ily from a tem­po­rary rental of your per­sonal res­i­dence, you need to start report­ing pay­ments of over $600 per year paid to var­i­ous crafts­men etc. via Form 1099-MISC in 2011.  You will need to col­lect infor­ma­tion nec­es­sary to com­plete form 1099-MISC; the usual method is get your con­trac­tors to com­plete a Form w-9.  The best advice is to have the con­trac­tor com­plete the form W-9 before they start work­ing for you, rather than wait­ing until you owe them money for the job. Get­ting the W-9 up from may help avoid con­flict over the 28% backup with­hold­ing you are sup­posed to do if they do not wish to give you a com­pleted w-9.

There may ulti­mately be a list of cer­tain pub­li­cally traded com­pa­nies such as Home Depot, Wal­mart & Sta­ples that may be exempted from the new report­ing requirements. Furthermore elec­tronic funds trans­fers (online bill pay etc.) may also be exempted from infor­ma­tion report­ing  in the same way debit and credit card trans­ac­tion are, BUT as of this date there is NO guid­ance from the IRS along these lines.

7/13/2010 Update: The 1099 report­ing of pay­ment of over $600/year to cor­po­ra­tions will only apply to cash, check or barter accord­ing to the IRS.  It may be time to insti­tute a pol­icy of pay­ing cor­po­ra­tions via credit or debit card. This comes about because start­ing next year credit card proces­sors will be required to report total annual credit card trans­ac­tions to the IRS via 1099-K; the IRS will be able to com­pare a cor­po­ra­tions gross receipts with the report from the credit card processor.

As part of the Patient Pro­tec­tion and Afford­able Care Act signed into law March 23, 2010, by Pres­i­dent Obama, busi­nesses will be required to report pay­ment of over $600 per year of goods or ser­vices made to any­one, includ­ing cor­po­ra­tions, except for enti­ties exempt under 501 (a), which are char­i­ties and the like.  Sec­tion 9006 of the Act amended Sec­tion 6041 of the Inter­nal Rev­enue ser­vice code-go ahead, look it up.  This change in infor­ma­tion report­ing has been dis­cussed for a long time as a means of track­ing down more tax cheats, but until now con­gress had not acted upon it.

The require­ment for infor­ma­tion report­ing starts in 2012.  This start date sug­gests that means your busi­ness will need to be gath­er­ing report­ing infor­ma­tion in 2011, so it can be reported on 2012 1099s.

The law rep­re­sents a con­sid­er­able expan­sion of infor­ma­tion report­ing via 1099-MISC; in the past cor­po­ra­tions were gen­er­ally excluded from infor­ma­tion report­ing; only pay­ment for ser­vices (and goods paid for inci­dent to the ser­vice) over $600 per year, and goods over of $5000 per year need to be reported.

The IRS uses 1099 infor­ma­tion for income match­ing ,which helps them iden­tify busi­nesses that are under report­ing of income and not pay­ing all of their taxes.  Yes, even your busi­ness is com­pelled to be an agent of the IRS under cer­tain circumstances.

So what do you need to do now? Start get­ting w-9s from every­body includ­ing cor­po­ra­tions: you must have a cur­rent address and valid Tax Payer Iden­ti­fi­ca­tion Num­bers (EIN or SSN) for any ven­dor you rou­tinely pay more than $600 per year for goods or services-starting in 2011.  A Form w-9 is the rec­om­mended method for obtain­ing this infor­ma­tion; it is avail­able in PDF for­mat from the IRS.gov web­site (pdfs can be printed out using adobe acro­bat reader which can be down­loaded for free from the adobe.com web­site).  Art and Busi­ness Con­sult­ing LLC and its own­ers and employ­ees are not affil­i­ated with IRS or Adobe.

Be sure your account­ing pro­gram lists pur­chases by ven­dor and amount paid as you will also need this infor­ma­tion to prop­erly pre­pare the 1099s in 2012.  Look at the length of your ven­dor list, and you will see this project is not one to be under­taken at the last minute. If you are like most busi­nesses you prob­a­bly have only been report­ing a very small por­tion of that list.  It’s going to take a while as some ven­dors will be reluc­tant to sup­ply the infor­ma­tion when asked.  In 2011 you will have no choice, you will be required to gather this information.

What do I do if a busi­ness does not vol­un­tar­ily sup­ply the W-9 infor­ma­tion when asked? Your busi­ness is sup­posed to do backup with­hold­ing of 28%, mean­ing you are sup­posed to keep 28% of what you oth­er­wise would have given to them in pay­ment and give it to the gov­ern­ment instead.  The threat of back-up with­hold­ing is usu­ally enough to ensure coop­er­a­tion on the part of the entity com­plet­ing the W-9. Update 12/14/2010: The penal­ties have increased. For will­ful dis­re­guard its $250 for each 1099 you fail to file; the penalty may be reduced to $30-$100 (depend­ing on how late it is) of the you can show the fail­ure to file was not inten­tional. There is a $50 per ven­dor per year fine for fail­ure to 1099.    The fine may be waived if it is not shown to be from will­ful neglect. Since the new infor­ma­tion report­ing require­ment will be for the tax year 2011 do not do backup with­hold­ing on non­com­pli­ant cor­po­ra­tions until then.

What if I don’t’ want issue the 1099s? In addi­tion to the $50 fine per occur­rence for fail­ure to obtain a W-9 (see Form W-9 page 2), the gov­ern­ment comes back to you for all the other business’s taxes; this is called Will­ful Dis­re­gard by the IRS and they take a dim view of it.  So you get to pay the other guys taxes and yours.  Very gen­er­ous.  So either issue the 1099’s and deduct what you paid them, or don’t deduct what you paid and don’t issue the 1099’s.  Mat­ters not to your book­keeper or accoun­tant, you pick.  How many people’s taxes are you will­ing to pay?

As always Art and Busi­ness Con­sult­ing is here to help.  If you need help with this issue another small busi­ness and or tax issue, please give us a call.

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in. The con­tent of this blog gen­er­ally applies to busi­ness and indi­vid­ual tax­a­tion in the United States of Amer­ica.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant, human resource spe­cial­ist, or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice. Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.

Tags: 1099-MISC, 2011, 2012, expanded annual information reporting, non-employee compensation, Patient Protection and Affordable Care Act, penalties, w-9

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