1099 Tax Software Blog

Your state government sent you some money. That sounds good.

So, is it taxable? Don’t know?

Okay. Let’s figure it out.

You have received form 1099-G because you received a payment from your state. That payment could be for a number of reasons:

• Unemployment
• Tax Refund from prior year
• RTAA Payments
• Taxable Grants
• Agriculture Payments
• Market Gains on repayment of CCC loans

Box 1 – If the answer is unemployment, you definitely must report that as income on your federal tax return. If you were wise enough to have had federal and state taxes withheld, then that will also show up on the 1099G, in Box 4 and Boxes 10a, 11 and 12, and should be added to taxes paid in on your federal and state returns. State requirements for reporting may be different. Refer to your tax professional to find out.

Box 2 – When you filed your taxes last year, you got a state refund. Why does that matter? Because if you itemized your taxes last year (used Schedule A) and used your state withholding as a deduction (instead of deducting sales taxes) then all or part of that refund might be considered income this year. Why? If you use an amount as a deduction, and benefit from that by paying less tax, and then also get that same amount as a refund, then you’re “double-dipping” and the IRS doesn’t go for that. So, you have to do the calculation to add all or part of it back as income (ask your tax professional if you are unsure how to go about this.) If you didn’t itemize last year, then you can throw this away, because you don’t need it.

Box 5 – Did you receive RTAA (Reemployment Trade Adjustment Payments)? Those are wage subsidy payments made by the state when an employee 50 years of age or older has lost a job due to trade issues and is later reemployed at a lower wage. This program provides a partial subsidy for two years, and because it is intended to replace wages, it is taxable.

Box 6 – Amounts that appear here are generally for energy cost subsidy payments for private residences or funds for projects to conserve energy. This might also represent certain taxable federal grants above $600.

Box 7 – Most Agricultural Program payments received must be reported on schedule F, Part 1.  There are some payments you can exclude, from certain cost-sharing conservation programs.  Report the full amount of any other payments received, even if you refunded or refused some payments. You can claim the reduction elsewhere on the schedule F.

Box 9 – This amount represents the market gain associated with the repayment of a CCC loan, whether it was repaid with cash or with CCC certificates.

As with any tax information, if you are unsure of how something applies to your tax situation, you should contact a tax professional.

Running a business is expensive. If you’re the owner or proprietor of a business, then there is only so much that you can do in terms of tax deductions on payments made with respect to the business. Beyond a limit, those payments are capped, and the rest is taxable. However, one method that the IRS offers to increase your deductions and reduce your taxable income from the business is putting to good use the Form 1099-MISC. This form is required by the IRS for employers to report payments made with respect to the business but outside the interests of the firm.

The 1099-MISC is used to report only payments made in the course of business, and not personal payments. Other organizations subject to these reporting necessities include nonprofits, profit-sharing plan or qualified pension trusts, farmers’ cooperatives exempt from tax, and certain establishments exempt from tax under section 501(c) or (d).

While the businesses use the Form 1099-MISC to report such payments, independent contractors are supposed to report all revenues on Form 1040 and Schedule C. These expenses are helpful in reducing the profits from your work or business and hence reduce your tax component payable in that year to the IRS.

Understanding 1099-MISC

The 1099-MISC is used to report those payments that have been made towards jobs or to workers or independent contractors for the jobs undertaken by them. Generally speaking, employers are required to file and report Form 1099-MISC for each individual to whom they have remunerated miscellaneous income, such as royalties or brokerage expenses, rent, services with respect to the business, awards and prizes from radio or TV contests, other income expenditures, healthcare and medical expenses, insurance proceeds, cash purchases paid for fish purchase and to owners of shipping boats from anyone engaged in the trade or business of catching fish, or gross proceeds paid to attorneys during the year.

In short, payments made by the employer for services performed to a business by people who are not its employees, i.e., independent contractors, are to be reported on Form 1099-MISC.Every contractor paid minimum $600 during the tax year is to be reported individually.

Who needs to file a 1099-MISC?

Individuals and entities need to file the Form 1099-MISC,based on IRS rules, with respect to non-wage income and other expenses. First, you need to determine if the concerned payments you made fall in the 1099 category. Any entity or individual who has paid the following amounts in the categories to independent contractors must file form 1099-MISC with the IRS:

• Broker and/or royalties expenditures with respect to dividends/tax-exempt interests in excess of $10, or
• Rent payments, payments towards services with respect to business, TV or radio winnings, awards and prizes, payments towards other income, healthcare and medical expenses, insurance proceeds from crops, cash expenses for fish bought in the fish-catching business or paid for fishing boats totaling an excess of $600, or
• Attorney expenses paid
• Sales of minimum $5,000 of FMCGs to a buyer for resale anywhere but a retail concern.

Who cannot be included under the specifics of the Form 1099-MISC?

The following individuals or entities (not limited to) need not file the 1099-MISC with the IRS:

• If you are employed by a firm or a registered corporation, then you are not supposed to file the Form 1099-MISC.
• Entities or individuals paying for scholarship/fellowship support (student should file return)

When is Form 1099-MISC to be filed?

The Form 1099-MISC must be reported and filed before 31^stJanuary of the following year. Additionally, the employer is also supposed to file and report another Form 1096, which summarizes the contents of the Form 1099-MISC. Form 1096 is not needed if the reporting is done via e-filing. The following dates are the deadline for filing the Form 1099-MISC:

• January 31^st– 1099-MISC Form must be sent to the recipient
• February 28^th – The Form 1099-MISC is to be filed with the IRS physically via paper
• April 1^st – The Form 1099-MISC is to be filed electronically with the IRS

Companies can apply for a 30-day extension to file with the help of Form 8809; however this extension does not extend to the form being submitted to the independent contractor.

What is the process for filing Form 1099-MISC?

The 1099-MISC is a multi-part form. The information on the Form 1099-MISC is to be completed adhering to the detailed instructions supplied by the IRS.  The following 4 copies are to be crated and distributed:

• Copy A to be submitted to the IRS
• Copy B and 2 to be submitted to the contractor for his/her IT returns
• Copy 1 to be given to the tax department of the state, i.e., if it is applicable (physically on paper or electronically)
• Copy C is to be reserved for the employer’s archives

What is the process for e-filing Form 1099-MISC?

• The e-filing of the 1099-MISC can be done online on the IRS website or the individual can download the e-Smart Form of the 1099-MISC on his computer and upload the data and information on the IRS website.
• Additionally, the process of e-filing does away with the copy A of 1099-MISC. However, the additional still need to be given and distributed to the contractors.
• Also, e-filing does away with the necessity to file Form 1096 with the IRS.

Selecting the correct e-service provider for filing Form 1099-MISC

There are certain stipulations to look out for when looking for an IRS-approved e-service provider for filing Form 1099-MISC. They are listed below:

• Should be approved by the IRS (will have the IRS logo on their website)
• Must be secure and safe to trust with important info(check the site’s security certificate)
• Should be user-friendly
• Should be affordable, reasonable and cost effective
• Have ample client assistance service – phone, email, etc.

Printing additional copies for distribution purposes

If the individual has made use of the e-Smart Form version of the 1099-MISC, then the additional copies can be easily printed using Microsoft Word.

If e-filing method has been used, then additional copies can be printed after the submission of the e-file.

The excel interface can be utilized to import data into the e-Smart Form to create an e-file so that re-typing of information can be done away with. Be careful while using the interface as data could be duplicated or missing. To overcome this problem, copy the cells individually so that the file is structure properly.

Incorrect information and/or amounts on the Form 1099-MISC

In case of incorrect amount or info on the form, contact the firm/business that issued you the 1099-MISC. On the safer side, you should probably wait for the corrected form before you file your tax return. You could also e-mail the Tax Compliance Office of the IRS or call toll-free at 866 258-0908.

Filling the Form 1099-MISC – For Businesses

As a business owner, you need to have the following information with you which will be needed by you while filling the Form 1099-MISC:

• Information of the payer, including your business’ name, address and your federal employer ID number and the recipient’s/contractor’s ID number.
• The amounts mentioned earlier which fall under the purview of 1099-MISC must be ready with you to be entered and mentioned. The amounts are to be entered separately in the appropriate boxes.
• You are also required to state in Box 4 any amounts of income tax withheld from payments to the contractor.
• You are also required to state Section 409A deferrals and revenues in Boxes 15 (a) and (b).
• In the area with respect to the Local and State Info, any information regarding state tax without will be stated including the amount and the payer’s/state’s number. If the info has more than 2 states, you will need to fill another 1099-MISC Form.
• Double check the amounts and info on the form and then print and distribute the forms as outlined earlier.
• Lastly, you must organize and submit Form 1096 to the IRS which summarizes and totals all the amounts and the information of the 1099 forms.

 

Significance of Form 1099-MISC for Contractors

If you’re an independent contractor, then you are eligible to receive the form 1099-MISC by 31st Jan which will be used to report your income as an independent contractor to the IRS. It basically indicates to the IRS how much revenue you earned from a particular establishment.

Box 7 on the Form 1099-MISC features “Non-employee compensation”, which will be filled in with your annual revenue from the firm, concern or establishment that employed you will be stated. The contractors are then needed to report and file the same incomes on Form 1040 Schedule C, and this will be filed it with the IRS. Hence the 1099-MISC along with the Schedule C will be used by the independent contractors to report for their tax purposes. Hence, what objective the W-2 serves for employees of a company, the 1099-MISC does the same for the independent contractor who is self-employed.

Independent contractors must remember that they should complete the 1099-MISC form even if they receive, let’s say $400 from one employer and $500 from the other. Even though their income is not from one source, since it exceeds $600, they will be liable to file Form 1099-MISC with the Schedule C.

Penalties for not filing the Form 1099-MISC

Centered on how late and when you file the return with the correct info, the penalties for late filing are:

• $30 per info filed correctly within 30 days (maximum penalty $250,000/year limited to $75,000 for small industries).
• $60 per info filed correctly between 30 days (March 28^th)and 1^st August (maximum penalty $500,000/year limited to $200,000 for small industries).
• $100 per info filed correctly after 1^st August (maximum penalty of $1,500,000/year limited to $500,000 for small industries).
• $250 penalty for deliberate failure to file.

E-commerce has seen a boom in the last 5 years, and as it became clear that it was a very worthwhile way to make revenue for businesses, the IRS was struggling to keep with collecting the taxes that should have come their way. While the online sellers and made money, the IRS was losing it with no voluntary tax compliance in sight.

The government wants to know how much money moves through online sales. Hence they passed a law and introduced the 1099-K which allowed them to track the money with the help of websites such as Amazon, PayPal, etc. made.  When any online seller sold a product, sites such as above track all those sales and send the sellers a exhibiting and showing the seller how much he has sold at the end of a particular period. This process uses the Form 1099-K. The seller gets a copy, and in turn, so does the IRS.

Understanding Form 1099-K

The Housing Assistance Tax Act of 2008 says that the Form 1099-K must be filed for payments to the merchant made by credit, debit card or 3^rd party entities like PayPal by a payment settlement entity.

Starting January 2011, the IRS requires the reporting of certain e-transactions and payments separately to improve voluntary tax compliance and payment. The 1099-K provides this particular info regarding any of the payments listed below:

• If you have gotten payments from merchant card transactions (e.g. MasterCard or Visa cards)
• If you have gotten payments from 3rd party payment settlement networks (online buys) above the thresholds of:
  • Gross expenditures that exceed $20,000, as well as
  • In Excess of 200 such transactions.

All business processing such payments also come under the purview of the Form 1099-K.

Transactions required to be reported by the Form 1099-K

“Payment card transactions” have a very specific definition in the tax code, and all such transactions must be reported under the 1099-K. It includes all stored-value cards, gift cars, debit cards and credit cards.

The form specifically includes the incomes and revenues data for the full 12-monthly year, adding the sub-total for each month too. This means that the gross sales are to be reported, unadjusted for returns or credits, and that too by the transaction date and not the settlement one.

Why must gross sales be reported on the Form 1099-K?

The IRS takes into account the fact that certain businesses or companies might be able to obtain benefits from the probable and potential deductions on these payments such as returns, other fees and charge backs.

Who must file the Form 1099-K?

Filing of the Form 1099-K must be done by the entity identified as the payment settlement entity (PSE) towards 3^rd part network and payment via card transactions during the particular year. Simply put, a PSE is a domestic/foreign entity, identified as the “merchant” entity, i.e., the bank or any other organization that has the obligation to make payment during card transactions online. There can be the co-existence of multiple PSEs for the same reportable transaction. In that case, it is the PSE that gives the order to transfer funds that must file the return. However, the other PSE can also file the return if all parties agree in writing.

Additionally, there can be the existence of another party in the transaction called the “Electronic payment facilitator”, who has been designated to make payments by the PSE to settle reportable transactions on its behalf. In such case, the EPF is also supposed to file the Form 1099-K in lieu of the PSE. Payment gateways that appear when individuals pay bills or book tickets can be classified as EPFs. They are also known as the “payment entity”

Receiving Form 1099-K

1099-K is sent to the individual/entity on or before 31st January, 2013 to the mail address where all their regular mail correspondence goes.

The new requirements of the IRS were made accessible via the many publications of the IRS and info was available on the website www.irs.gov as well.

What does the PSE need to do?

The Federal “TIN” (also known as Tax Identification Number) is used to identify different business, much like a social security number for individuals. It is the identification number for businesses, and in most cases is either the employer identification or the social security number.

As a merchant entity, you must see to it that your payment processor has the right legal name as well as TIN on the file. Accurate tax information that matches IRS records will help prevent any hassles during the entire process.

Finding out TIN and legal name

The legal name is generally the business vendor’s or proprietor’s name as presented on IT returns with the SSA, and/or on the Social Security card of the business proprietor; this for individuals or proprietorships.

The legal Name is the name of the business the merchant given on the Form SS-4 to the IRS. If owners are still confused, they can communicate with the IRS to put in a request for the Form 147C, through which he can confirm the info.

If the TIN and legal names of the business/owner are different from that what the IRS has, in that case the merchant is subject to backup concealing from any future payments made.

Refusal to provide legal name and TIN

If the business owner or individual refuses to provide the legal name and Tin for correct filing, then that will lead to an incorrect Form 1099-K to be filed with the IRS. Eventually, the IRS will subject you to the backup-tax withholding mandated by the IRS. This process requires the payment processors to remit such amount specified by the IRS (due from the merchant as tax under the 1099-K) straight to the IRS. Such processes will have a negative impact on the business hence it is prudent to check your records, and provides the IRS with the necessary info required for the correct filing of 1099-K.

Existence of multiple merchant accounts

The IRS mandates that payment transactions for every business with a unique TIN must be filed and reported on separate 1099-K forms. Even If your business has more than one merchant account, the 1099-K bunches up sales for accounts with the same TIN.

What is the significance of the account no.?

The account number is included to assist merchants with their records, and is the number for the merchant account. The IRS, however, is fixated on the TIN and not your account number. If you have two or more merchant accounts with the identical TIN, the 1099-K looks up the merchant number which has the highest sales volume.

Information to be reported on Form 1099-K

The following info needs to be necessarily reported on the IRS Form 1099-K:

• Gross amount of payment transactions that are reportable on the 1099-K(payment card and third party network payments) made to each contributing recipient sans any adjustments
• The payee’s name, address and tax ID number.

The dollar amount of each transaction is determined on the date of the transaction.

How to file Form 1099-K?

The 1099-K can be filed electronically through the online system of the IRS, the Fire (filing info returns electronically). The form can also be physically sent on paper to the either the IRS office in Austin or Kansas City, whichever jurisdiction your business falls under. The details of the states under the jurisdiction of both addresses are given on the IRS website.

Reported amount more than settlement amounts

The IRS requires the gross amount, whereas the business sales might be adjusted for refunded amounts, fees, discount amounts, cash equivalents, credits, or any other amounts.

Monthly statements and sales mismatch

The mismatch might occur due to the following reasons:

• Since the 1099-K form comprises sales from across all of the accounts with the same TIN, the mismatch might occur if the merchant is considering the sales from only one account.
• Since the IRS reports only gross sales on the Form 1099-K,and the monthly statements report both net and gross sales, the mismatch might occur due to having overlooked the correct amounts to be reported.
• Since the IRS requires reporting sales by the transaction date and the monthly statements do so by settlement date, the mismatch may occur on the 1099-K.

What is the MCC?

The Merchant Category Code (MCC) is a 4-digit number used by the card organizations and associations, such as MasterCard and Visa, to categorize businesses based on the types of goods and services they provide.

How is an MCC selected for the 1099-K?

The MCC that best represented the business based on the delegated card association guidelines was assigned to the merchant account that was set up. However, if the business happened to have two or more merchant accounts, then the 1099-K form chooses the MCC of the account that has the highest sales volume.

Receiving the 1099-K even after the account has been closed

Since the IRS requires the activity in that year to be reported, the 1099-K will apply on the account from the beginning of the year till the time the account has been closed.

Form 1099-K and the 1099-MISC

The 1099-MISC forms remain for reporting as they are. The 1099-K is just an additional supporting form.

Penalties for not reporting the 1099-K

The penalties could be anything from the mismatch of gross receipts to the intentional non-filing of Form 1099-K. These consequences could be anything from fines to an audit.

You receive a monetary gift as appreciation or a thank you for something you did.  Later, you receive a form 1099-MISC reporting that “gift” as other income to you and to the IRS.  What does the recipient, in this case, do?

Gifts or awards or prizes for services not performed count as other income.  If the gift is $600 or more, then its the payer’s responsibility to prepare and send a 1099-MISC reporting the value of the gift.  The taxpayer must report this amount as other income on Form 1040.

Many people say “but it was a gift”.  If the gift was $600 or more, the payer was legally obligated to report this.

This is a common question.  You e-filed incorrect data through the IRS FIRE System.  Relax.  Others have as well.  I have been down this path.  You have choices:

1. When you submit a file to the IRS FIRE System, the initial data is sent to the Enterprise Computing Center – Martinsburg.  Their address and phone number are here:

IRS-Enterprise Computing Center – Martinsburg
Information Reporting Program
230 Murall Drive
Kearneysville, WV 25430
866-455-7438
or outside the US 1-304-263-8700

It takes about 10-12 days before the data is released to the IRS.  If you submitted incorrect 1099 data, you have that 10-12 window to call the above number (866-455-7438) and ask them to delete the file you sent.  Have your TCC on hand and the file number and they will be able to close the file with no replacement by the phone.

2. If the data has been released to the IRS, then you must file a correction.  Void is not an option.  There are 1-step corrections and 2-step correction.  A 1-step correction is when you are correct money amounts, distribution codes or amounts.  A 2-step correction is needed when you are correct a TIN and/or payee name.  Here you put together 2-files; the first file has the original incorrect TIN/name and the money amounts set to 0 (this voids the transaction) and the second file has the correct TIN/name and money amounts.  Both files are corrections; the first file uses a ‘G’ for a corrected return indicator while the second file uses a ‘C’.

The 1099-MISC has Copy A, B, C, 1 and 2.

Copy A is sent to the IRS along with the 1096.

Copy B is sent to the recipient and the recipient keeps that copy.

The payer or the business issues the 1099-MISC forms to vendors/contractors should retain Copy C.   You don’t have to print and store.  Instead, you can retain a PDF of copy of these forms.

Copy 1 is sent to the State Tax Department.

Copy 2 is to be filed with recipient’s state income tax return, when required.

 

There are lots of places where you can get blank, red-ink 1099 forms. I get my tax forms from my local library.  If they don’t have the forms on hand, just ask your librarian.  They can easily attain more and quickly.

Your local post office might have the red-ink forms on hand as well but I have never had success with my local post office.

You can order the forms are free by calling the IRS at 1-800-TAX-FORM or 1-800-829-3676.  The forms are free and shipping is free and you receive the forms within a few days. Don’t forget to order form 1096 which is the summary transmittal.

You can download the 1099-MISC form here

www.irs.gov/pub/irs-pdf/f1099msc.pdf

But its important to remember that the online forms are for informational purposes only.  You can not use them to actually file a 1099 form.  The red-ink forms are scanned by the IRS.  Even if you could print the forms in a red-ink, the official forms use a special red-ink for scanning purposes.  The red-ink that your printer uses is not the same kind of red-ink that the IRS uses to create the 1099 forms.

 

Form W-2G is used to report gambling winnings. If your gambling winnings are high enough, the payer must provide a W-2G form to you and to the IRS, reporting the amount of your gambling winnings.

The types of gambling fall under the following three headings:

 

• Horse Racing, Dog Racing, Jai Alai, and Other Wagering Transactions Not Discussed
• Sweepstakes, Wagering Pools, and Lotteries
• Bingo, Keno, and Slot Machines

Form W-2G is used to report income and withholding related to gambling.€€ Generally, you will receive a Form W-2G if you receive:

• $600 or more in gambling winnings and the payout is at least 300 times the amount of the wager (except　winnings from bingo, keno, and slot machines);
• $1,200 or more in gambling winnings from bingo or slot machines;
• $1,500 or more in proceeds (the amount of winnings less the amount of the wager) from keno; or

Any gambling winnings subject to federal income tax withholding.

Who must file Form W-2G

The payer, namely, the organization sponsoring the gaming event, must file Form W-2G when an individual wins a prize over a specific value amount. The form is used to report gambling winnings OR to report gambling winnings and any federal income tax withheld on the winnings.

Form W-2G due dates

Copy B and C is due to the winner by the end of January. Copy A is due to the IRS by the end of February.　 If you are filing electronically, you have until March 31 (an additional month) to file and you can seek also seek an extension of time to file.

How do I complete Form W-2G?

Check the “Corrected” box at the top of the W-2G form if applicable. If you are submitting an original or replacement, leave the correct and void boxes unchecked.

Enter the payer’s name, address, federal identification number and telephone number.

Enter the winner’s name and address and taxpayer identification number or TIN.

Box 1. Enter the gross winnings.

Box 2. Enter the Federal income tax withheld. Federal income tax must be withheld at the rate of 25% on certain winnings less the wager.

Box 3. Select the type of wagers, which include: Horse track race, Dog track race, Jai-alai, State-conducted lottery, Keno, Bingo, Slot Machines and Other.

Box 4. Enter the date won!

Signature and Date. Sign and date Form W-2G if your are the only person entitled to the winnings.

No.

1099 forms used by payers to report payments made to a taxpayer (or recipient).  The most popular 1099 form is the 1099-MISC which is used to report payments of $600 or more that were paid by the payer to a recipient.

Schedule C, which is sent with Form 1040, is used to report self-employment income and calculate taxable profit.

Lets consider an example.  I hire someone to paint my house.  I, the homeowner, am the payer.  The painter is the recipient.  Lets say the painter charges $5,000 to paint my house and the paint cost $500.  The homeowner or payer sends  the painter Copy B of Form 1099-MISC at the end of the year reporting the $5,000 payment.  The homeowner also sends Copy A of Form 1099-MISC to the IRS.  The painter fills out Schedule C showing the $5,000 they were paid as business income and then deducts the $500 in paint cost as a business expense.  The difference of $4,500 is painter income.

I hope this helps.  E-mail any 1099 question you might have.

This is a common question and a good question.

If you are paper filing Form 1097-BTC, 1098, 1099, 5498 or W-2G along with the 1096 and your principal business, office or agency, or legal residence in the case of an individual, is located in the following states:

Alabama, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Texas, Vermont, Virginia, West Virginia

Then you use the following mailing address:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301

If your principal business, office or agency, or legal residence is located in any of these states:

Alaska, California, Colorado, District of Columbia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, Wyoming

Then you use the following mailing address:

Department of the Treasury
Internal Revenue Service Center
Kansas City, MO 64999

If the payer’s legal residence or principal place of business is outside the United States, mail the completed forms to:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301