1099 Tax Software Blog

Social Security Number (SSN) masking is encouraged and one of the best ideas the IRS has come up
with. Filers can replace the first 5 digits of a Taxpayer Identification Number or TIN with an
X or *. An example would be

***-**-1234 or XXX-XX-1234

You can mask social security numbers (SSN), employer identification numbers (EIN) and
masking is now permitted for all tax forms including Form W-2.

Identity Theft

The motivation for TIN masking is to reduce identity theft. Here is what can happen. A
filer mails a tax form to a recipient and because its a tax form, the envelope must be
marked “Official Tax Document Enclosed”. If the tax form is stolen and the SSN is not
masked, someone could use the recipient’s name, address, and full SSN to file a fake
tax return seeking a large tax refund before the recipient files. The tax refund is
deposited on prepaid debit cards whereby the theft can withdraw the cash anonymously.
When the true recipient files their real tax return later on, they then have to prove their
identity, correct the fraudulent return and its an overall paperwork nightmare for the recipient.

By default, 1099FIRE prints and mails all information returns with the SSN masked.  The
client can request to remove masking but we encourage masking when printing and mailing
any tax forms.

Yes.

Copy B of a 1099 form can be printed on plain paper with black ink.  The payer could hand-write all of Copy B and send that to the recipient.

Copy A is sent to the IRS on red-ink forms.  In the publication General Instructions for Certain Information Returns, it is written

“Although handwritten forms are acceptable, they must be completely legible and accurate to avoid processing errors.”

You can fill-out Copy A by hand with black ink and block print (not cursive) and mail in. Do not enter “none” or “n/a” for a box that has no money value.  Instead leave that box blank.

Not typically.

Employees receive a W-2 form which shows the amount of wages paid to that employee as well as federal income tax withheld.

1099 forms are issued to independent contractors. A homeowner who hires a painter to paint their house for a $1,000 has to issue a 1099-MISC form to that contractor for miscellaneous income of $600 or more.  If the painter charged less than $600, the homeowner would not have to report it to the IRS.

W-2 forms typically show that an employer has withheld federal tax, social security, medicare and so forth while a 1099 form typically does not show federal income tax withheld (it might, but typically it doesn’t).  An employee is not likely to receive a W-2 form from an employer as well as a 1099 form.  I can’t think of any cases where a situation like this would arise.

Yes and no.

Copy B from a 1099 form is sent by a payer typically by the end of January for the prior tax year.  The payer must paper file the 1099 forms along with the 1096 (summary of the 1099’s) by the end of February or electronically file by the end of March.  The payer can file an online extension giving them until the end of April to efile.

In theory, a payer can paper or electronically file any 1099 form almost any time of the year, but if the forms are late, the IRS may assess a penalty.

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 payee 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.

Form 1099-PATR is due to the payment recipient by January 31 following the calendar year in which the distribution was given.  It is also required to be sent to the IRS by February 28 along with appropriate state and local revenue services and Form 1096.  If you file electronically, you have until the end of March and you can file for an automatic 30-day extension taking the due date to the end of April.

Copy A of Form 1099-PATR has the look and feel of a normal sheet of paper printed with a special red ink.  If you submit Copy A by mail to the IRS, it must be submitted on their page with their special ink. Copy B and Copy C of the 1099-PATR can be printed on ordinary paper or on the tissue-like paper the IRS provides.

Good question!　You have everything typed out on the 1096 and respective 1099, 1098, 3921, 3922, or W-2G forms; where do you mail the information returns?

If your principal business, office or agency, or legal residence in the case of an individual, is located in:

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 mail the forms to: Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301.

If your principal business, office or agency, or legal residence in the case of an individual, is located in:

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 mail the forms to Department of the Treasury, Internal Revenue Service Center, Kansas City, MO  64999.

Remember to prepare and submit IRS Tax Form 1096. Form 1096 is a summary of information return forms being sent to the IRS. IRS Form 1096 Annual Summary and Transmittal of U.S. Information Returns is a sort of cover page to all other 1099 forms being filed.

The due date for paper filing the 1099 forms is typically the end of February or early April.  You must have your envelope with the 1099 tax forms and 1096 postmarked on or before the due date.

1099 software at the site 1099fire.com lets you detach and insert Copy A of an IRS form into your printer and the software will print your data on top of the red-ink IRS form.  You can adjust the left and top margins so that the data prints perfectly on the form every time. Copy B and Copy C (or Copy 1, 2) can be printed on plain, letter size paper with black ink.

Do not download, print, and file Copy A with the IRS. Because paper forms are scanned during processing, you cannot file Forms 1096, 1098, 1099, 3921 forms, 3922, or 5498 that you download and print.  Copy A must be submitted on the red-ink forms that the IRS provides.  The forms are free and can be ordered by phone or online from the IRS.  You can order the red-ink tax forms by calling 1-800-TAX-FORM (800-829-3676), an IRS provided toll-free number.  There is no charge for calling, shipping or handling and the IRS will ship up to 100 forms per call.  Its an excellent and free service.

Independent contractors have several differences in the way that they should conduct business with an employer, as outlined by the IRS. The difference between an independent contractor and an employee can be confusing for some employers. Reviewing example scenarios can help employers understand the difference and avoid misclassification.

Due to every job having its own unique requirements, worker classification can be a point of confusion for some employers. As a general rule, the more that a worker controls when, how, and where the work is performed, the more likely he or she is an independent contractor. However there are other details that make the differentiation complicated. Reviewing example scenarios can help employers become acquainted with the differences, along with the documentation that the IRS provides on its website.

A few scenarios were reviewed previously on this blog, and below are some additional scenarios:

Example 1 – Ted is hired to paint the exterior of a university building. Ted is paid a flat fee for the work, and he uses all of his own equipment and his own van. Ted must work at the university, but he is free to start and stop work whenever he wants. He has a contract with the university to complete the job within 2 months. Ted was paid a flat fee retainer to start the job, and he will be paid the remainder once the job has finished. Ted is financially liable if something goes wrong with the project.

Ted is an independent contractor. He uses all of his own equipment and he is paid a flat fee for the specific goal of painting the building. Once the building has been painted the work will be complete.

Example 2 – Rick is hired by a shipping company to drive one of their trucks. Rick must wear the shipping company’s uniform and is required to follow their other dress guidelines. The shipping company has a supervisor that oversees Rick while he is working and sometimes directs him to change his route. He is required to clock in at 8 A.M. every morning and must work until the route is complete or mostly complete. Rick is free to take three 30 minute breaks during the day whenever he likes, but he must have most of the route completed by the end of the day.

Rick is an employee of the shipping company. Although Rick has some freedom as to when he can take his breaks, he has oversight on almost every other aspect of his job.

Example 3 – Sarah works as a waitress for a local pub. She has flexibility in picking the days that she comes into work, but once she arrives at work she must stay for at least 4 hours and reports to the manager. She is paid with a combination of an hourly wage and tips. She works part-time, and she received paid on-site training for her first 2 weeks.

Sarah is an employee of the pub. Although her work schedule is flexible, once she arrives at work she is required to work 4 hours and report to a manager.

Knowing the difference between an employee and an independent contractor is critical for both tax and legal purposes. If an independent contractor is misclassified as an employee the consequences can be costly.

There are multiple factors that determine the differentiation, and knowing them well is critical for any employer. If there is any doubt, it is generally safer to classify a worker as an employee rather than a contractor, to avoid penalties and other legal issues.  Misclassification may result in an employer being liable for unemployment insurance, health insurance, stock options, vacation, back taxes, unpaid overtime, and more.

Record Keeping and Tool Usage

Independent contractors maintain their own records and generally work for more than one client. They invoice the business owner for any work completed. Independent contractors generally use their own tools and products for the work that they perform.

Employees are not required to maintain payment records, and employees are usually provided with any tools needed to perform the work by their employers.

Taxes and Hiring

Independent contractors are responsible for paying their own taxes, however employees must have their taxes withheld by their employer. Hiring and firing a contractor is less complicated compared to hiring and firing an employee, and there are fewer potential legal issues involved as well.

Sub-contracting and Liability

Contractors may sub-contract their work to other people. A contractor also takes commercial risks that an employee does not take. A contractor can be held liable for issues with their work.

Employees are not allowed to sub-contract their work and generally must complete it themselves. Also, an employer is almost always liable for any legal issues resulting from their employees’ work.

Control over Work Performed

An independent contractor has the freedom to do their work however they prefer; an employer is not allowed to dictate work terms to them. There may be an agreement or written contract with some work terms that are specified, but those terms are mutually agreed to by both parties.

An employee is required to work as instructed by the employer, and employees are required to come into work at specific hours.

Payment and Financial Loss Risk

Contractors have more of a risk for a loss on a particular project, as they may be required to purchase tools or equipment for a project. They may also sub-contract the project to other workers which is another opportunity for a profit loss as well. At the same time, contractors may also gain a profit from their work. Employees are not responsible for financial losses that may occur during their work.

Employees are usually paid a guaranteed hourly wage or a salary, while independent contractors can be paid either hourly or with a flat fee. Independent contractors are paid based on the achievement of a specific goal or set of goals.

Knowing the Differences

The IRS has a 20-factor test that has been previously discussed on this blog that is also helpful for employee status determination. If there are any questions about the status of a worker, the IRS provides free support for advice regarding making a determination, and Form SS-8 is used for this determination.

The IRS uses a 20 factor common-law test to determine whether a worker is an independent contractor or an employee, and offers Form SS-8 for employers or workers who need assistance with this determination. Studying a few example scenarios is also very helpful for worker status determination. The scenarios below outline some of the most common differences between independent contractors and employees.

Example 1 – John is asked to troubleshoot a law firm’s computer network. John’s IT support company and the law firm have a contract with a specific goal of fixing the networking system outlined. John brings one of his employees with him to work on the job. John uses his own tools, and while he works on the networking contract he also works on another IT support contract for a medical clinic. John is also allowed to pick his own schedule for the job.

John is an independent contractor in this example. If John was an employee he would not be allowed to subcontract his work to others. He would also be supplied with tools by the law firm and would not work for multiple clients. And he would not be able to choose his own schedule if he was an employee.

Example 2 – Mike is a mechanic who is paid a flat rate per job. He works specific hours on a regular schedule at the auto shop. The shop provides him with most of his tools, although he brought a few tools with him from his previous job. The auto shop is liable for any problems that may occur as the result of Mike’s work. Mike also works on several different vehicles and he does his work exactly as directed by his supervisor. Mike receives a paycheck every 2 weeks.

Mike is an employee of the auto shop. Mike is required to work as directed; he cannot perform work under his own terms. Although he is paid a flat rate per job, his employer is still required to withhold taxes from his paycheck and pay for his benefits.

Example 3 – Sarah is hired by a software company as a full-time sales representative. She must report to a sales manager twice per week and work 40 hours per week. She is free to perform her job duties with a less oversight than normal due to her past experience in sales. Her travel and business expenses are reimbursed by the software company, and she is provided with a company car. She is provided with paid training and with financial resources to help her achieve her sales goals, and she is paid a base salary plus commission.

Sarah is an employee of the software company. Although she has some freedom to do her work as she pleases, she only works for one company. This company provides her with everything she needs for her work and reimburses her travel expenses. She is also required to report to her manager regularly and she does not work for any other company.

Note: Sales representatives must be classified on a case by case basis, as each job is unique. In some of the cases where a sales representative is classified as an independent contractor, the IRS may still require Social Security, FUTA, and Medicare tax withholding if the worker meets all eight factors of the statutory employee test.

More information on this can be viewed on the IRS website: http://www.irs.gov/publications/p15a/ar02.html#en_US_2012_publink1000169473

Two types of workers may be hired by a LLC – employees and independent contractors. Form 1099-MISC for independent contractors is the equivalent of the W-2 form that employees receive every year. Form 1099-MISC is used by LLCs to report any income over $600.00 paid to independent contractors as a requirement by the IRS. Independent contractors are commonly hired by LLCs due to long term cost savings and less oversight required.

If a LLC hires a contractor and pays them over $600.00 during the year, Form 1099 must be issued to the contractor by January 31 of the following year. Some taxpayers are granted a little extra time, up to February 16^th, to mail the form to the contractor. Sometimes employers send 1099s late, however late 1099 reporting may be penalized by the IRS unless there is a reasonable cause, so most employers will try to file them by the 31^st of January.

Form 1099-MISC will show the income that the contractor received during the year, but there are no taxes withheld from that income. This is because independent contractors are required to pay their own taxes. If a contractor does not pay their taxes, or if they pay an incorrect amount, they are likely to be audited by the IRS at some point. LLCs should submit a W-9 form to their independent contractors at the beginning of their work. The W-9 form lists the contractor’s most recent address, business name, and EIN for tax purposes. The W-9 is kept on file for 1099 issuing and for the LLC’s records. LLCs should hire independent contractors who have the proper business structure in place for tax purposes.

The IRS should receive a copy of any 1099 forms that are sent to contractors. The LLC or employer has until the end of February to send a copy of the 1099 to the IRS, and if the forms are filed electronically the due date is extended to March 31. Generally there is a brief time delay between the time that a 1099 form is issued to an employee, and the time that it is sent to the IRS, which allows for any errors to be corrected. For instance, if a contractor received an incorrect income amount on his or her 1099 form, then the employer should be notified as quickly as possible so that there are no inconsistencies. Amended 1099 forms can be submitted to the IRS as well if an incorrect form was already submitted.

The IRS uses a matching system to check if the 1099 issued to them matches the reported income on the contractor’s tax return. This is to ensure that income LLCs or other businesses pay to contractors is taxed. Therefore it is very important for contractors to accurately report their 1099 income on their tax returns to avoid a potential audit. If there is a discrepancy that could not be worked out with the employer or 1099 issuer, it must be explained on the tax return. Independent contractors should also make sure to maintain an updated address with their clients to ensure that 1099 forms arrive on time.