1099 Tax Software Blog

Contract workers, or freelancers, are workers who are hired on a project-by-project basis.  The IRS 1099-MISC form is used by employers to document the earnings of contract workers.

More and more businesses are hiring contract workers because their costs are generally lower than W-2 employee costs.

This is because contract workers’ earnings do not require deductions of social security, income and state tax, unemployment, health insurance, or any other type of deferred compensation.  Contractors are required to calculate any tax deductions and pay any taxes owed to the IRS on their own.

At the end of the tax year, the 1099-MISC form is sent by employers to any contractors hired during the year, and it is also submitted to the IRS for income tracking purposes.

Some examples of workers that would receive a 1099 form at the end of the tax year include freelance writers, artists, contract IT specialists, temporary laborers, and more.

Form 1099-MISC is a 5 page form where Copy A is sent to the IRS, Copy B is given to the payee or recipient and Copy C is retained by the filer or payer.  Copy A has the look and feel of  a normal sheet of paper while the other copies are almost like tissue paper. The 5-pages are connected together by a perforated edge.

The IRS requires that Copy A be submitted on their special paper with red ink if you are submitting less than 250 filings a year.  Otherwise, the IRS encourages you to submit electronically. Filing Information Returns electronically is very cost-effective, is easier than filing on paper, and is more accurate. Filing status is available within 2 business days for Forms 1098, 1099 and W2-G and electronic filers receive a later due date for most returns. When you file electronically, you are exempt from using pre-printed forms.  You can just print the Copy B on plain paper with black ink, email a PDF file to all recipients, fax Copy B to the recipients or just print it out and hand it to the recipient.

The 1099-MISC form is the most popular form to report contract worker earnings.  The other variations of the 1099 form are used to show interest and other types of earnings.

A cooperative (or “co-op”) is an organization that is owned and run jointly by its members.  And since a cooperative business belongs to the people who organized to provide the goods and services, they share the profits or benefits.  Distributions to the members of the co-operative are known as patronage dividends.

IRS Form 1099-PATR (Taxable Distributions Received from Cooperatives) is an information return used by cooperatives to report distributions exceeding $10 in patronage dividends or other distributions.  It is also used to report any amount of federal income tax withheld under backup withholding rules.  For instance, if a payee did not furnish a tax identification number to the cooperative, the payer is required to backup withhold at 28%.

Many or most cooperatives will be required to fill out a 1099-PATR form for each recipient that received distributions.  There are exemptions for some types of cooperatives for reporting these distributions. In particular, cooperatives that are mostly created for the sale of goods and services that are used for personal, living, or family expenses can apply for an exemption from the IRS.  But, the IRS must first qualify the cooperative from exemption before it can be determined that no 1099-PATR form should be required.  A tax professional should always be consulted if there is a question on whether or not a 1099-PATR information return should be filed.

The top of Form 1099-PATR asks for payer name, address, phone and TIN.  The payer is this case is the cooperative itself. The bottom part asks for the recipient name, address and TIN.

There are 10 boxes on IRS Form 1099-PATR.  Each box is discussed below:

Account number.  This is a unique number the cooperative uses to distinquish it’s members or payees.

Box 1. Shows the patronage dividends paid to a member during the year.

Box 2. Shows the nonpatronage dividends paid to a member during the year.

Box 3. Shows the per-unit-retain allocations paid to a member during the year.

Box 4. Shows the federal income tax withheld or backup withholding.

Box 5. Shows redemption of nonqualified notices and retain allocations.

Box 6. Shows domestic production activities deduction.

Box 7. Shows unused investment credit passed through to a member by the cooperative.

Box 8. Shows unused work opportunity credit passed through to a member by the cooperative. This credit is scheduled to expire on December 31, 2012.

Box 9. Shows patron’s alternative minimum tax (AMT) adjustment passed through to a member by the cooperative.

Box 10. Shows other unused credits and deductions (including depreciation) passed through to a member by the cooperative.

IRS Form 1097-BTC is a new form starting in 2012 that issuers of certain tax credit bonds use to report tax credit to the bond holders and the IRS.

A bond is a type of loan. Every time I think of a bond, I think back to my days I served on my local Village Board. The Village I lived in wanted a library that cost roughly $4 million dollars to build. In this example, the Village (or debtor) issued bonds to finance this purchase. The bonds are debt security in which the issuer will pay interest, usually at a fixed intervals, and the principal at a later date. Very often the bond is negotiable and the bond ownership can be transferred in the secondary market.

Tax Credit Bonds (TCB) are a type of bond that offers the holder a federal tax credit instead of interest. The bond issuer maintains the responsibility to pay the principal on the bond. TCB’s provide an interest-free loan for the issuer. In 2008, Congress amended the tax credit bond rules to permit tax credits to be sold separately from the related bond. This is known as “stripping” the tax credit and makes the debt instrument more attractive to investors.

There are two entities to keep in mind; there is the original recipient who is allowed a tax credit and there may exist a person or entity that received the tax credit and is now distributing the tax credit to someone else.

Tax Credit Bonds that need to be reported include:

• Build America Bonds
• Qualified Forestry Conservation Bonds
• New Clean Renewable Energy Bonds
• Qualified Energy Conservation Bonds
• Qualified Zone Academy Bonds
• Qualified School Construction Bonds
• Clean Renewable Energy Bonds
• Midwestern Tax Credit Bonds
• and others…

Who must file?

Anyone who is allowed a tax credit, directly or indirectly, from a tax credit bond or a stripped tax credit during the calendar year in an amount of at least $10 must file Form 1097-BTC.

Form 1097-BTC

The top part of Form 1097-BTC shows the issue name, address and TIN followed by the recipient name, address and TIN. The bottom part has two check boxes that asks whether the filer is the original entity to receive this tax credit or whether the filer is a person or entity that received this tax credit from someone else as a distribution. One of those check boxes needs to be checked.

The other edit boxes are discussed here:

Box 1. Shows the aggregate total of credits allowed.

Box 2a. Shows the code identifying which type of unique identifier the issuer plans on using in Box 2b. There are 3-codes, namely, A – Account number, C – CUSIP number and/or O – any other identifier.

Box 2b. Shows account number, CUSIP number or other unique identifier for the bond. The unique identifier can be at most 40 alpha numeric characters.

Box 3. Shows bond type as a code. There are 2-codes; 101 – Clean renewable energy bond, 199 – Other.

Box 5a-5l. Shows the amount of credit allowed for the month during the calendar year.

Copy B of Form 1097-BTC is sent to the recipient by the end of January. Copy A must be paper filed to the IRS by the end of February or electronically filed by the end of March.

You have a car, boat or an airplane that has $500 or more in value. You want to donate that vehicle to a charitable organization. That’s great and very generous of you. Oftentimes these charity organizations clean up the donated vehicles and then resell them to need individuals at below-market rates. The organization that receives this gift must fill out IRS Form 1098-C and send Copy B to you and Copy A to the IRS. You, the donor, can attach Copy B of Form 1098-C to your income tax return to take a deduction for the contribution. Form 1098-C also confirms that you, the donor, were not part of any future transactions of this vehicle.

IRS Form 1098-C reports Contributions of Motor Vehicles, Boats and Airplanes. The first part of the form asks for the donee name, address, phone and TIN followed by the donor name, address and TIN. There are 7 questions on the form which are discussed below:

Box 1: Shows the date the charity received the donated car, boat or airplane.

Boxes 2a, 2b, 2c reports the year donated, make and model of the vehicle.

Box 3: Shows the vehicle identification number (VIN) or any other identification number for that car, boat and/or airplane.

Box 4a is a check box. The box is checked if the donee certifies that the vehicle was sold in arm’s length transaction to an unrelated party.

Box 4b is the date of sale and box 4c is the gross proceeds from the sale.

If 4a is checked, the donor can generally take a deduction equal to the smaller of the amount in box 4c or the vehicle’s fair market value on the date of the contribution.

Box 5a is checked if the donee certifies that the vehicle will not be transferred for money, other property or service before completion of material improvements or significant intervening use.

Box 5b is checked if the donee certifies that the vehicle is to be transferred to a need individually for significantly below fair market value.

And box 5c is a description of the material improvements made to the donated vehicle.

Box 6a is checked yes if vehicle was donated in exchange for goods or services.

Box 6b is the value of goods and services provided in exchange for the vehicle.

Box 6c asks for a description of the goods and services and has a check box that is checked if the donee certifies that the goods and services consisted solely of intangible religious benefits.

Box 7, the last check box, is checked means the donor may not claim a deduction of more than $500 for this vehicle.

IRS Form 1099-DIV, Dividends and Distributions, is used to report dividends, capital gains, nontaxable, and liquidation distributions.

The top of IRS Form 1099-DIV shows the payer name, address and TIN followed by the recipient name, address and social security number.
The form also asks for the account number. The account number is just a unique number that the employer uses to distinguish this employee’s account. If you are electronically submitting files with 250 records or more to the IRS, then you need an unique account number.

Each box of IRS Form 1099-DIV is discussed below:

Box 1a. Shows total ordinary dividends that are taxable.

Box 1b. Shows the portion of the amount in box 1a that may be eligible for the 15% or zero capital gains rates.

Box 2a. Shows total capital gain distribution.

Box 2b. Shows the portion of the amount in box 2a that is unrecaptured section 1250 gain from certain depreciable real property.

Box 2c. Shows the portion of the amount in box 2a that is section 1202 gain from certain small business stock that may be subject to a 50% exclusion and certain empowerment zone business stock that may be subject to a 60% exclusion.

Box 2d. Shows 28% rate gain from sales or exchanges of collectibles.

Box 3. Shows non-dividend distributions or the part of the distribution that is nontaxable.

Box 4. Shows federal income tax withheld or backup withholding.

Box 5. Shows recipient’s share of expenses of a non-publicly offered regulated investment company.

Box 6. Shows foreign tax paid.

Box 7. Shows foreign country or us possession. This box should be left blank if a regulated investment company reported the foreign tax show in box 6.

Box 8. Shows cash liquidation distributions.

Box 9. Shows noncash liquidation distributions.

Box 10. Shows exempt-interest dividends.

Box 11. Shows specified private activity bond interest dividends.

Box 12, 13, 14. Shows state, state identification number and state tax withheld.

Copy B of IRS Form 1099-DIV is sent to the recipient by the end of January.

The IRS requires payers to paper file Copy A of Form 1099-DIV and Form 1096 to their office. Payers can choose to mail paper forms to the IRS directly or to electronically file their 1099-DIV forms. You can file electronically through the Filing Information Returns Electronically System (FIRE System) you will be required to have software that produces a file in the proper format. The IRS requires payers filing 250 forms or more to electronically file. This rule applies to each type of 1099 form separately.

IRS Form 1099-INT is used to report interest income paid to individuals. Any organization that has paid interest income, withheld foreign tax on interest or withheld federal tax under the backup withholding rules must file IRS Form 1099-INT.

Form 1099-INT was revised in 2012. The top of the form shows the payer name and address and TIN followed by the recipient name, address and TIN.

The form asks for the account number. The account number is just a unique number that the employer uses to distinguish this employee’s account. If you are electronically submitting files with 250 records or more to the IRS, then you need an unique account number.

There are 13 boxes on IRS Form 1099-INT. Each box is discussed below:

Box 1. Shows taxable interest income paid to the recipient during the calendar year by the payer. Box 1 does not include interest shown in Box 3.

Box 2. Shows interest or principal forfeited because of early withdrawal. Oftentimes, Box 2 is blank but if a value does exist, the recipient may deduct this amount to figure their adjusted gross income on their income tax return.

Box 3. Shows interest on US Savings Bonds, Treasury bills, Treasury bonds and Treasury notes. This interest is exempt from state and local income taxes.

Box 4. Shows federal income tax withheld. Withholding typically applies if the recipient fails to furnish a correct SSN to the payer. This box is oftentimes blank.

Box 5. Shows investment expenses.

Box 6. Shows foreign tax paid.

Box 7. Shows foreign country or us possession.

Box 8. Shows tax-exempt interest paid to the recipient during the calendar year by the payer.

Box 9. Shows specified private activity bond interest.

Box 10. Shows tax-exempt bond CUSIP number(s).

Boxes 11-13. Shows state, state identifcation number and state tax withheld. These 3-boxes are new for the 2012 IRS Form 1099-INT.

Copy B of IRS Form 1099-INT is mailed to the recipient by the end of January. Copy A of 1099-INT is paper filed with Form 1096 by the end of February. The IRS requires electronically filed 1099-INT forms to be submitted by the end of March. You can request and automatically receive a one-month extension taking the due date for electronically submitting 1099-INT forms to the IRS by the end of April.

Use 1099 software to make the e-filing process easier and to comply with federal submission standards. For first-time filers, you will need to register with the IRS. The IRS will assign you a Transmitter Control Code. This is an identification code you will use when e-filing using the FIRE System. Apply for this code by filling out IRS form 4419.

IRS Form 1099-MISC is used to report miscellaneous income of $600 or more which is received by individuals or companies in non-employee service payments. The income shown on Form 1099-MISC is taxable. Form 1099-MISC is by far the most popular of the 1099 forms. Its also one of the more detailed forms prompting the payer to fill out up to 16 boxes of data.

The first part of Form 1099-MISC shows the payer name, address, phone number and taxpayer identification number (TIN). This is followed by the recipient name address and TIN.

Then the account number is filled out. If you are submitting more than 250 records, then you want to established a unique account number for each recipient. You don’t want to use any part of the recipient’s SSN as the account number so that you don’t compromise the SSN in any way.

The box “2nd TIN not.” is checked to indicate notification by the IRS within 3 calendar years that the payee provided an incorrect name and/or TIN combination. You can check whether the payee name matches up with the TIN that they provided but using the IRS Bulk TIN matching service. If the name/TIN does not match, keep following up with the recipient. You can run TIN matching as often as you like to verify whether the TIN matches the name.

The next 16 boxes may or may not apply to the recipient that you are working with. Many of these boxes will be blank; fill in only the boxes that apply.

Box 1. Reports rents.

Box 2. Reports royalties.

Box 3. Reports other income.

Box 4. Reports federal income tax withheld.

Box 5. Reports fishing boat proceeds.

Box 6. Reports medical and health care payments.

Box 7. Reports non-employee compensation.

Box 8. Reports substitute payments in lieu of dividends or interest.

Box 9. Is checked if the payment made direct sales of $5,000 or more of consumer products to a buyer for resale.

Box 10. Reports crop insurance proceeds.

Box 11 and Box 12 are grey filled and should be left blank.

Box 13. Reports excess golden parachute payments.

Box 14. Report gross proceeds paid to an attorney.

Box 15a. Reports section 409a deferrals.

Box 15b. Reports section 409a income.

Box 16. Reports state tax withheld.

Box 17. Reports state/payer’s state number.

Box 18. Reports state income.

IRS Form 1099-S is used to report gross proceeds from the sale or exchange of real estate. The settlement agent or person responsible for the closing of the real estate transaction must report the real estate proceeds to the IRS and must furnish Copy B of Form 1099-S to the seller. If the real estate was not your main home, report the transaction on Form 4797, Form 6252, and/or the Schedule D for the appropriate income tax form.

The top of IRS Form 1099-S asks for the filer name and address and the transferor name and address. The filer is the settlement agent and the transferor is the seller. The transferee is the buyer.

The form also asks for the account or escrow number. The account number is just a unique number that the filer uses to distinguish this transferor’s account. If you are submitting less than 250 filings per year, then the account number can be blank. However, if you are submitting 250 or more filing per calendar year, then you need an account number.

There are five boxes on IRS Form 1099-S. Each box is discussed below:

Box 1. Shows the date of closing.

Box 2. Shows the gross proceeds from the real estate transaction which is typically the sales price. Gross proceeds include cash and notes payable to the seller. Box 2 does not incldue the value of other property or services the seller received or will receive.

Box 3. Shows the address or legal description of the property transferred.

Box 4. If checked, represents that the seller received or will receive services or property (other than the cash or notes described in Box 2) as part of the consideration for the property transferred.

Box 5. Shows the Buyer’s part of real estate tax. If the seller has already paid the real estate tax for the period that includes the sale date, subject the amount in box 5 from the amount already paid to determine the seller’s deductible real estate tax. If the seller has already deducted the real estate tax in a prior year, report this amount as income on the “Other income” line of the appropriate income tax form. More information is in Publication 523, Publication 525, and Publication 530.

Copy B of 1099-S forms must be mailed to the seller by January 31. Copy A must be paper filed by the end of February or the settlement agent can efile Copy A by the end of March. If the settlement agent is efiling, they are exempt from using the pre-printed red-ink 1099-S and 1096 forms.

IRS Form 3921 is a new form businesses were required to report in 2011 for Incentive Stock Option (ISO) exercises occurring in 2010. An ISO is the right to purchase a certain number of shares of stock at a pre-established price.
The top of IRS Form 3921 asks for the transferor name and address and the employee name and address. The business or transferor is required to prepared IRS Form 3921 and the recipient must recognize (report) gain or loss on their tax return for the year in which they sell or otherwise dispose of the stock.

The form also asks for the account number. The account number is just a unique number that the employer uses to distinguish this employee’s account. If you are electronically submitting files with 250 records or more to the IRS, then you need an unique account number. If you are submitting more than one 3921 for the same employee, then you need a unique account number.

There are 6 boxes on IRS Form 3921. Each box is discussed below:

Box 1. Shows the date the incentive stock option to purchase was granted to the employee.

Box 2. Shows the date the employee exercised the option and purchased the stock at a pre-established price.

Box 3. Shows the exercise price per share of stock which was pre-established between the employer and employee.

Box 4. Shows the fair market value (FMV) of a share of stock on the date the option was exercised. Here the IRS wants to know how good (or bad) of a deal you received.

Box 5. Shows the number of shares of stock transferred from the employer to the employee at the exercise price shown in Box 3.

Box 6 is optional and shows the name, address and EIN of the corporation whose stock is being transferred to the employee if this corporation is not already shown in the upper left corner of the IRS 3921 form.

The 2006 Tax Relief and Health Care Act (TRHCA) mandated that started in 2011, a corporation must file an IRS Tax Form 3921 each time in transfers stock to an employee who has exercise an incentive stock option, with an exemption made for employees who are non-resident aliens.

An employee stock purchase plan is a way in which employees of a corporation can purchase the corporation’s stock often at a discount. Typically, employee’s contribute to the plan through regular payroll deductions, which accumulate between the offering date and the purchase date. At the purchase date, the accumulated funds are used to purchase shares in the company on behalf of the participating employees. The amount of discount depends on the plan but can be as much as 15% lower than the market price.

IRS Form 3922 is a new form starting in 2011 that businesses are required to report Transfer of Stock Acquired Through an Employee Stock Purchase Plan (ESPP) Under Section 423(c).

The top of IRS Form 3922 asks for the corporation name and address and EIN followed by the employee name and address and SSN. The corporation is required to prepared IRS Form 3922. No income is recognized when an employee exercises an option under an employee stock purchase plan. However, the employee must report gain or loss on their tax return for the year in which they sell the stock.

The form also asks for the account number. The account number is just a unique number that the employer uses to distinguish this employee’s account. If you are electronically submitting files with 250 records or more to the IRS, then you need an unique account number.

There are 8 boxes on IRS Form 3922. Each box is discussed below:

Box 1. Shows the date option granted. This is the offering date or the date the option to purchase the stock was granted to the employee.

Box 2. Shows the date option exercised to the date employee funds where used to purchase shares in the company.

Box 3. Shows the fair market value (FMV) per share on the date the option to purchase the stock was granted or offered to the employee.

Box 4. Shows the FMV per share on the date the employee exercised the option to purchase the stock.

Box 5. Shows the price paid per share on the date the employee exercised the option to purchase the stock.

Box 6. Shows the number of shares to which legal title was transferred by the employee.

Box 7. Shows the date legal title of the shares was first transferred by the employee.

Box 8. If the exercise price per share was not fixed or determinable on the date entered in box 1, box 8 shows the exercise price per share determined as if the option was exercised on the date in box 1. If the exercise price per share was fixed or determinable on the date shown in box 1, then box 8 will be blank.

Copy B of Form 3922 must be sent to the employee by the end of January. Copy A must be paper filed by the end of February or electronically filed by the end of March.