As a business owner you know the importance of timely filing and payment of your payroll tax obligations, as well as, timely paying your vendors. But how well versed are you in the possible reporting requirements of your vendor payments and the issuing of Form 1099-MISC?
IRS regulations stipulate that a 1099-MISC should be issued to each independent contractor (non-employee) that was paid $600 or more during the calendar year (see below for what types of payments apply). Independent contractors can include an individual or a partnership. Payments to corporations are not subject to reporting with limited exceptions. For example, attorney’s fees are required to be reported regardless of whether the payee is a corporation.
Reporting on vendor payments and issuing a Form 1099-MISC is only required when they are made in the course of your trade or business; personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit, however, nonprofit organizations and federal, state or local government agencies are subject to the reporting requirements as well.
Types of payments to be reported on a Form 1099-MISC include rents, royalties, services (including parts and materials) and other income payments, including payments of prizes and awards and payments made to related parties. For example, many business owners today have a related entity that holds the real estate that the business occupies and rents under a lease agreement. These rent payments would be included in the required filing if the entity that holds the real estate is an LLC. Also, payments for goods are not required to be reported.
Failure to complete a 1099-MISC may result in penalties. Therefore, businesses want to be sure to obtain the information needed to properly complete the filing. IRS Form W-9, Request for Taxpayer Identification Number and Certification, should be completed by all new vendors annually and will provide businesses with the necessary information to properly complete the Form 1099-MISC, such as name, address and Tax Identification Number (TIN).
If a vendor fails to furnish their TIN, you are technically required to withhold taxes from their payment. Problems can occur if a completed Form W-9 has not been received and full payment to the vendor was made. For example, during an audit, the IRS may assess backup income tax withholding upon you, the payer, because you never received a completed Form W-9 and a full payment was made to the vendor. You may find that you do not have all of the information needed to properly complete a Form 1099-MISC and it may be difficult to get the form after the fact. Also, you may find that you should have collected backup withholding because the vendor is not exempt.
Best practices dictate that part of the payment approval process should include obtaining the completed Form W-9 prior to payment being made. Businesses who put this step into place find that they will receive the form promptly from the vendor in order to be paid timely and in full.
When you receive a form, how do you know if the information is correct? Businesses can gather the information and process the information returns only to receive a notice from the IRS, (potentially with penalties), that they have filed the returns with incorrect TINs. To avoid this, the IRS has established a TIN On-Line Matching program to help businesses file the correct information. This service requires registration and enables businesses to check the TIN furnished by the vendor against the name/TIN contained in the IRS database maintained for the program. This step would eliminate the instances of incorrect TIN notices from the IRS. The ideal time to check this information is during the payment approval process, before payments are issued, in order to resolve any discrepancies with the vendor. Registration and other information can be obtained by visiting http://www.irs.gov/pub/irs-pdf/p2108a.pdf.
When is my Form 1099-MISC due? The 1099-MISC forms must be completed and furnished to the payees no later than February 2, 2015. The due date for the information return, if filed in paper form, is March 2, 2015. If filed electronically (required for those who file 250 or more information returns) the due date is March 31, 2015. One Form 1096 is also required to be submitted to the IRS as a transmittal for all Forms 1099-MISC. The Form 1096 should be mailed to the IRS with the Form 1099-MISC and has the same due date.
What if your payee is a foreign person? In general, a foreign person would be subject to U.S. tax on their U.S. source income, which would require a business to withhold tax from its payment. The withholding is typically at a 30% rate. There are situations where a reduced rate or exemption may apply if there is a tax treaty between the United States and the foreign person’s country of residence. Businesses will want to obtain a Form W-8BEN from the foreign person to establish their foreign status and claim that they are the beneficial owner of the income for which the form is being furnished. They can also claim a reduced rate of, or exemption from, withholding under an income tax treaty. Different types of income are also subject to different withholding requirements. Publication 515 can provide further detail. You should consult with your tax practitioner for further assistance.
Whether or not the business needs to withhold, Forms 1042 and 1042-S must be filed to report payments of amounts subject to withholding and/or the reduction or exemption of such withholding payments. Both forms are due by March 15th of the year following the calendar year in which the income subject to reporting was paid, and the recipient of the income must also receive a copy of Form 1042-S by the same date.
It may be worthwhile to step back and take a look at your payment practices to ensure that your business is in compliance with the proper reporting requirements, thereby reducing exposure to potential penalties in this area. Implementing some of the practices above might save your staff some time chasing information from your vendors after the fact, as well as, improve your business relationships at the same time.
This information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Please contact our office (603-627-3838) for more information on this subject and how it pertains to your specific tax or financial situation. Howe, Riley & Howe, PLLC would be happy to answer your tax and financial questions regarding these issues or other matters that may be of interest to you or your business.