1099 Tax Software Blog

Before they file their taxes, it is critical that employers and workers have determined whether the work they have performed or paid for is considered contract or employee work. This is because contract and freelance work have different tax laws.  Also, the IRS may audit or fine companies that misclassify their employees as contractors.  Since the deadline to send information returns to the IRS is at the end of February, this distinction should be made as soon as possible.

Contractors and employees are subject to different tax withholdings. For employees, their employer is required to deduct the appropriate social security, Medicare, unemployment insurance, worker’s compensation, and other state taxes from their employee’s wages. The split between the employer and employee is approximately 50%.

As a result, employers end up paying substantially more taxes for work done by employees rather than contractors. Employers pay few to no taxes for contractors, who are required to calculate and pay self employment, social security and other taxes on their own. Also, contract work is not subjugated to minimum wage laws.

The question of whether a worker is an employee or contractor is ultimately a question of independence and control. Contractors are independent workers who do not have work terms dictated to them (when, how, and where they work) outside of what is agreed upon by the independent contractor agreement. A contractor’s client is allowed by law to specify what is expected as a final result of the contractor’s work.  On the other hand, employees are allowed by law to have work terms dictated to them.

The Internal Revenue Service recommends determining whether a worker is a freelance on contractor with three factors: behavioral control, financial control, and the nature of the relationship.  The more that an employer controls these three factors with a worker’s job, the more likely the worker is an employee and not a contractor.

Behavioral control is defined as whether or not the employer has control over the worker’s actions at work and how the worker performs. Financial control refers to whether or not the worker’s earnings are determined by the employer and how much of the cost to the worker is reimbursed. The type of relationship refers to the type of contract between the worker and employer, whether or not there are employee benefits such as sick leave and vacation, and the length of the worker relationship with the employer is taken into account.

The IRS says that there is no “magic number” of controls that classifies a worker as an employee or contractor. The IRS recommends that if there is still a reasonable doubt on the classification of a worker after reviewing the three factors, then IRS Form SS-8 should be filled out by a worker or employer and sent to the IRS to have an official classification made.

Large food or beverage establishments are required to file Form 8027 to report tip income and allocation of tips to employees. Not all food and beverage establishments are required to file Form 8027. For example, you do not need to file an 8027 if your business was only in operation for one month in 2012. However, if your establishment meets all of the following criteria then you must file Form 8027 between February and April during the tax season:

1      Food or beverages are served with the intention of consumption on the premises.

2      Tipping is a customary part of the service.

3      More than 10 employees who work 80 hours or more are normally employed on a typical business day.

The majority of food or beverage establishments meet the first and second criteria on the list, but its the third qualification that is the concerning issue for most owners. All employees count toward the 10 employee requirement even if they do not regularly receive tips as part of their job function such as cooks and kitchen help.

There is a worksheet to help determine if you had more than 10 employees working on a typical businesses because you can still qualify with less than 10 employees. Please note that If you own more than one food or beverage establishment you must fill out Form 8027-T instead to itemize the receipts of each individual establishment.

What information is reported and filed on Form 8027?

The top part of the form contains fields as to the basic information about the establishment including the name, address and employer identification number. The Employer’s name and address information as shown on Form 941 is also required. To the left, you see a choice of 4 types of establishments. Only check one box that best describes your business: evening meals only, evening and other meals, meals other than evening meals or alcoholic beverages.

As you move through the form, lines 1-2 deal with credit charges specifically, the tips on credit charges and the gross receipt totals with tips respectively. Line 3 should reflect the total amount of service charges added to a customer bill that was then allocated to employees as part of their wages.

The subsections of line 4 are really the crux of Form 8027 and reflect the total amount of reported tips by indirectly and directly tipped employees. Indirectly tipped employees receive tips from other employees instead of customers such as cooks and bussers. A directly tipped employee receives tips from the customers such as bartenders and waitstaff.  Regardless of the source, any employee who earns $20 or more in tips on a monthly basis must report all tips to the employer. Add the amounts on lines 4a and 4b to calculate the total tips reported for the year.

On line 5, report the summation of the gross receipts for all food or beverage operations. Some things to consider when determining your gross receipts include cash sales, charge receipts and the retail value of complementary food or beverages if a tip was calculated based on the sale of that item.

Multiply the amount on line 5 by .08, unless you have been granted a lower rate by the IRS, and write this amount on line 6. Now compare the amount on line 6 with the amount on line 4c. If line 6 is less than lince 4c then your calculations for this form are complete. However if line 6 is more than line 4c, proceed to line 7 to allocate tips to employees.

Which calculation method is best to allocate tips to employees?

You have three options if you are required to allocate tips to employees: the hours-worked method, gross receipts method or good-faith agreement method. The hours-worked method simply distributes the tips to each employee based on the number of hours worked. Regardless of amounts earned, the employee who worked the most receives the largest allocation and so on down the line.

The gross receipts method is based on the amount of sales by each employee instead of the amount of hours worked. As a result, high performance employees with many sales receives the largest allocation regardless of hours worked.

The good-faith agreement method allows you to work out a custom arrangement based on circumstances of your particular establishment. The agreement is validated when two thirds of the staff agrees and signs the document. You must attach a copy of the agreement to Form 8027 if you select this option.

The result of your calculations are listed on each employee’s W-2 in box 8 to be reported as part of their individual wage. As a result, you should judge each allocation method on its fairness to your employees with regard to your particular situation.

Information returns are documents that record payments by individuals, estates, corporations, and trusts to any other party.  There are over 30 types of information returns that are required by the Internal Revenue Service to report transactions.  The IRS requires that information returns are sent to both the payment recipient and the IRS.  Payment recipients require a copy of information returns to calculate their own taxes and also to match the IRS’s record of their income.  Most information returns must be submitted to the payment recipient by the end of January and to the IRS by the end of February.  A few other types of information returns have different deadlines.

Information returns are a continually changing sector of the tax industry because of the complex nature and variety of transactions in business.  There are dozens of types of payments that should be reported by information returns including wages, severance pay, rents, gambling winnings, annuities, royalties, and many more.  The minimum amount that requires reporting varies depending on the type of payment.  For instance, for most but not all types of 1099-MISC payments, the minimum amount that must be reported is $600 or more.  However, for interest payments, which are reported with the 1099-INT form, any income above $10 requires reporting to the IRS.

Businesses and individuals have recently become more scrutinized by the IRS for not filing information returns.  Because of information returns being purposely miscalculated or not reported, there is a substantial tax gap – the difference  between taxes that are actually paid and should be paid – that is over $300 billion per year (as estimated in 2005 by the IRS).

The IRS recovered approximately $50 billion of that unreported income, leaving $250 billion more that could potentially be recovered.  Thus, the IRS has every incentive to penalize and audit businesses and individuals that do not correctly report their payments with information returns.  The IRS has openly stated that they are seeking to regulate information returns more because of this gigantic tax gap. In the future, more laws will likely be passed that will penalize late or unreported information returns

The two most familiar types of information returns are the 1099 and W-2 form.  The 1099 form is used to report the earnings of contractors while the W-2 form is used to report the earnings of employees.    Although it is sometimes unclear, it is important for both businesses and contractors to know the difference between an employee and contractor for tax purposes. This is because the difference affects tax withholdings and other tax calculations.  If for any reason the difference is unclear, then IRS Form SS-8 can be used to differentiate between the two.  A business, employee, or contractor can fill out the form and send it to the IRS, and they will officially determine the classification of the worker.

I hear this question often.  You hired and paid someone $600 or more within a calendar year to do some type of work.  When tax season arrives, you realize that the contractor you hired has moved.  Now what?

You, as the payer, have to do something.  Here are a few things you can do:

1. Call the contractor and try to get their new mailing address. You don’t have to mail Form 1099-MISC to the recipient.  You can print it out and hand it to them.  Or fax it or email it.  You just want to make sure they get the form and its data.
2. If you have his or her last known address, then contact the postmaster or local county clerk to see if they have the new address for this contractor.
3. Send the information return to the last known address that you do have.  If the letter bounces back to you, then you have made an effort.  You can still report the 1099 information to the IRS and the IRS will be able to track the TIN and the amount reported.

Doing nothing is not a good option.  You want to paper or electronically file the data with the IRS.  And make an effort to get Copy B of Form 1099-MISC to the contractor; take notes on the steps that you took and save them.

1099 software at the site 1099fire.com has software for paper and electronic filing of all 1097, 1098, 1099, 3921, 3922, 5498, 8027, 8955-SSA, W-2G, and 1042-S IRS tax forms. Import, print and eFile information returns the quick and easy way!

1099FIRE is the only company to offer OneTouch E-Filing. Just click a button and the software will automatically log in and upload your file to the IRS FIRE system.  You will receive verification within seconds of receipt of your file.

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 return in regular paper or email a PDF file to all recipients.

An Incentive Stock Option (ISO) is a way for corporations to attract and retain employees by granting the employee the right to purchase a certain number of shares of stock at a pre-established price.  The 2006 Tax Relief and Health Care Act (TRHCA) mandated that starting in 2011, a corporation must file an IRS Tax Form 3921 each time it transfers stock to an employee who has exercised an incentive stock option, with an exception made for employees who are non-resident aliens.  3921 software at the site 1099fire.com makes it easy to file IRS Tax Form 3921 by paper or electronically. Service bureau and mail house solutions are also available.

IRS Form 3921 includes such information as the date the option was granted, the date the employee exercised the option, the number of shares of stock transferred to the employee, the fair market value (FMV) of the stock when the option was exercised, and the exercise price of the stock. There is a space for the mailing address and federal identification number (FIN) of both the transferor and the employee, and for the name, address and EIN of the corporation issuing the stock, if other than the transferor.

Paper Filing, Electronic filing, Service Bureau…

Form 3921 can be filed by paper or electronically to the IRS. “Our 3921 software makes it easy to import from Excel, print and electronically filing IRS Form 3921 quickly and easily”, said Erich J. Ruth, Technical Support for 1099FIRE, a market-leading provider of 3921 software and services.  Sample Excel templates can be found on the website 1099fire.com which will import into the 1099FIRE software or technical support can guide you through the process of importing by phone or email.

Electronic reporting of information returns eliminates the need to submit paper documents to the IRS.  Electronically filed information may be submitted to the IRS 24 hours a day, 7 days a week.

“Electronic filing of Form 3921 is easy to do”, said  Ruth and  “The system is updated each year to reflect the format changes that are made by the IRS”. 1099FIRE software creates original, replacement, corrected and test files in the format required by the IRS for electronic transmission.

1099FIRE is the only company to offer One-Touch E-Filing. Just click a button and the software will automatically log in and upload your file to the IRS FIRE system. You will receive verification within seconds of receipt of your file.

Filing information returns can be stressful. 1099FIRE can eliminate the stress of filing information returns by electronically filing in a timely manner and at an affordable price. 1099FIRE will beat any competitor price; attain a quote for any service from any competitor and 1099FIRE will provide same, if not more complete, service at a lower price.

Visit the 1099FIRE website at www.1099fire.com or look for us on Facebook to stay up-to-date with important news, tax deadlines and the latest in compliance information.

Looking Ahead…

Furnish Copy B to the employee by January 31 of the year following the year of exercise to the IRS.  Furnish Copy C to the corporation whose stock is being transferred by January 31 of the year following the year of exercise of the ISO.

File Copy A of this form with the IRS by February 28 of the year following the year of exercise of the ISO. If you file electronically, the due date is March 31 of the year following the year of exercise of the ISO.

TIN matching allows a payer to submit a TIN/Name combination to be matched against IRS records. You can accomplish this interactively and receive an instant response for up to 25 TIN/Name combinations at a time or with Bulk TIN Matching, you can submit an electronic file of as many as 100,000 TIN/Name combinations and receive matching results by email within 24 hours. Both programs will:

• Match the payee with W-9 name and TIN with IRS records;
• Decrease backup withholding and penalty notices;
• Reduce the error rate in TIN validation.

IRS regulations are outlined in Publication 2108A (On-Line Taxpayer Identification Number TIN Matching Program).

TIN matching requests can be made for the following payment types:

1. Miscellaneous Income (1099-MISC)
2. Dividends and Distributions (1099-DIV)
3. Interest Income (1099-INT)
4. Real Estate Brokers and Barter Exchange Transactions (1099-B)
5. Original Issue Discount (1099-OID)
6. Taxable Distributions Received from Cooperatives (1099-PATR)
7. Merchant Card Third Party Network Payments (1099-K)

Within 24 hours of sending a request, the submitter will receive a response file, which indicates the status of each TIN/Name combination. The IRS displays one of the following “Match Indicator” codes next to the TIN and name combination:

0 = TIN and Name combination matches IRS records.

1 = TIN was missing or TIN not 9-digit numeric .

2 = TIN entered is not currently issued.

3 = TIN and Name combination does not match IRS records.

4 = Invalid TIN Matching request (i.e., contains alphas, special characters)

5 = Duplicate TIN Matching request.

6 = TIN and Name combination matches IRS SSN records.

7 = TIN and Name combination matches IRS EIN records.

8 = TIN and Name combination matches IRS SSN and EIN records.

Essentially, a 0 is a match and any value other than a 0 is a mismatch.

According to the IRS, there are approximately two million payees that have incorrect or missing TINs. The IRS sent 50,000-65,000 proposed penalty notices last year. The IRS penalty is $50.00 per mismatch!! Avoid IRS penalties by processing your Bulk TIN Matching.

Using the TIN Matching system allows you to verify the accuracy of taxpayer TIN and name information prior to submitting information to IRS. Internal Revenue Code 6724 provides any penalties under Section 6721 may be waived if the filer shows the failure to file a correct TIN on an information return was due to reasonable cause and not willful neglect. Filers may prove due diligence and receive a waiver from proposed penalties if they prove the TIN and name combination they submitted matched IRS records. Providing a copy of the Print Screen of your Interactive Results will be considered proof of due diligence.

IRS Form 1098-E is used by financial, government or educational institutions to report receipt of student loan interest of $600 or more during the year or one or more qualified student loans.

Qualified student loan.

A student loan must be either:

• Subsidized, guaranteed, financed, or otherwise treated as a student loan under a program of the Federal, state, or local government, or of a postsecondary educational institution, or

• Certified by the borrower as a student loan incurred solely to pay qualified higher education expenses.

Form 1098-E.

The top part of the form shows lender name, address and TIN followed by the borrower name, address and social security number.

Account number.  This is just a unique number that the lender uses to identify or distinquish this borrower.

Box 1. Shows the interest received by the lender during the year on one more more student loans made to this student.

If the loan is made on or after September 1, 2004, Box 1 must incldue loan origination fees and capitalized interest received.

If the loan is made before September 1, 2004, you may be able to deduct loan origination fees and capitalized interest not reported in Box 1.

Box 2. If checked, indicates that the loan was made after September 1, 2004 and that loan origination fees and/or capitalized interest are not included in Box 1.

Copy B of IRS Form 1098-E is sent to the borrower or student by the end of January.  You can print and mail Copy B, e-mail, fax or just print and hand Copy B to the student.  Copy A must be paper filed along with Form 1096 to the IRS by the end of February.  Or the lender can electronically file Copy A  by the end of March.

Why didn’t I receive a Form 1098-E?

The most common reasons as to why a student would not receive Form 1098-E are:

• Your interest payments for the tax year did not total $600 or more. Your loan servicer is required to issue a 1098-E only if the interest payments on your loan met or exceeded this threshold.
• Your 1098-E was mailed to the wrong address. If you did not have a current address on file with your loan servicer, then your form may have gone astray.
• You did not have a valid Social Security Number on file with your loan servicer.Without a valid SSN, Form 1098-E could not be generated for you.
• Your payments were not received within the “covered period” for your loan. Payees are required to report only those interest payments received within the first 60 months that your loan is in repayment, excluding periods of grace, deferment, and forbearance.

IRS Form 1099-C is used to report Cancellation of Debt.  Lenders use Form 1099-C to report to the borrower and the IRS that a debt of $600 or more has been canceled or forgiven.

Form 1099-C is an important form for the debtor.  If a creditor has discharged a debt owed by the borrower, then the borrower is required to include the forgiven debt on the “Other income” line of their 1040 form, even if the amount is less than $600.

The top part of Form 1099-C asks for the creditor name, address and then TIN.  This is followed by the debtor name, address and TIN.

There are 7 boxes on Form 1099-C.  Each box is discussed below:

Account number.  This is just a unique number the creditor uses to distinquish the borrower.

Box 1. Shows the date of the identifiable event.

When I think of the words “identifiable event”, I say to myself “what started it all”.  The borrower might have filed bankruptcy, was foreclosed on or the debt reached a statue of limitations on a certain date.  Box 1 shows the date the earliest identifiable event occurred or the date of an actual discharge.

Box 2. Shows the amount of debt discharged.  This is an important box for the borrower because it is the amount the borrower is required to show on their 1040 and will be treated as income.  If the borrower disagrees with this amount, then they should contact the creditor.

Box 3. Shows the interest if included in Box 2.

Box 4. Shows a description of the debt or property.

Box 5. Shows whether the borrower was personally liable for repayment of the debt when the debt was created or at the time of the last modification.

Box 6. Shows the identifiable event code. The codes are: A – Bankruptcy; B – Other judicial debt relief; C – Statute of limitations or expiration of deficiency period; D – Foreclosure election; E – Debt relief from probate or similar proceeding; F – By agreement; G – Decision or policy to discontinue collection; H – Expiration of nonpayment testing period; or I – Other actual discharge before identifiable event.

Box 7. Shows the fair market value of the property.

Copy B of IRS Form 1099-C is sent to the borrower by the end of January.  Copy A of Form 1099-C must be paper filed along with Form 1096 by the end of February or the creditor can electronically file Copy A by the end of March. Copy C is retained by the creditor for their records.

Its January.  Your putting together your information returns reporting taxable income paid from the prior year.  You have your list of payees that you worked with in the prior year and you notice that your missing the taxpayer identification number (TIN) for one or more payees.  What do you do?

Publication 1220 (Specifications for Filing Forms 1098, 1099, 5498, and W-2G Electronically) states on page 47 at Field Positions 12-20 that “If the TIN is not available, enter blanks” for the Payee B Record. A valid TIN must always be in the “Payer A Record” since it is a required field.

If your filing by paper, just leave the box asking for the payee TIN blank.  If your filing electronically, you can leave that box asking for the payee TIN empty as well and your software will automatically replace empty with nine blank spaces.

The payer, in contrast, must have a valid TIN.  The payer is the one who is required to fill out these information returns and submit them to the payee and the IRS.  If you don’t have a TIN for a particular payer, you can’t file by paper or electronically.

We offer bulk TIN matching as a service.  TIN matching lets you submit a name and TIN to the IRS and see if the name and TIN matches up.  Every year, we get a handful of clients who ask us to find the TINs for a name.  True story.  One client sent me a list with 200+ names of individuals and no TINs.  He asked to run Bulk TIN matching.  I told him it was “a TIN matching service and not a TIN finding service”.  He then said “so what do I have to pay you to get the SSN’s for the names that I have on the list”.  The service doesn’t exist; nobody has the ability to find SSN’s for an individual.  Nobody!  The most you can do is see if the name and TIN that you have matches up with the name and TIN that the IRS has on file.   EIN’s in contrast are public information.  You can attain an EIN for a business.  There are websites that will help you find an EIN for a business. But there does not exist any service to help you find a SSN given the name or vice versa.

Copy B of most of the 1098, 1099, 3921, 3922 Forms must be distributed to the receipient by the end of January (31st).  Sometimes the due date falls on the 1st or 2nd of February, but the end of January is a good date to remember.  Forms 1099-B, 1099-S and 1099-MISC (boxes 8 and 14 only) are due by February 15.

Copy B can be mailed to the recepient, e-mailed, faxed or just plain handed to them.

What happens if you work with someone or do business with someone and they don’t provide a 1099 form?  I hear this question often.

One thing you can do is call that respective business or individual.  On a personal note, every year I should receive IRS Form 1099-INT (Interest Income) from my local bank for interest earned from one of my accounts.  The account earns more than $10 in interest per year which is the threshold for sending out the 1099-INT form.  In the past (before 2008), I always received Form 1099-INT on time.  Now I receive nothing.  I use to call and get the run around. But eventually, I found someone at the bank and they just gave me the information over the phone.  I could have also attained the total from reading each quarterly statement but I wanted to make sure I had the same total interest that the bank had. Businesses are struggling right now and sometimes a phone call will get you the information you want.

You can also call the IRS.  The IRS number is 800-829-1040.  You will need to provide your name, address, SSN number and phone number.  You will also need the contact information of the business or individual you are expecting a 1099 form from.

Not receiving a 1099 form on time is what the IRS calls “Failure to Furnish Correct Payee Statements (Section 6722)”.  Try doing a search for that phrase on any search engine and you will quickly find this:

“If you fail to provide correct payee statements and you cannot show reasonable
cause, you may be subject to a penalty. The penalty applies if you fail to  provide the statement by January 31 (February 15 for Forms 1099-B, 1099-S, and 1099-MISC (boxes 8 and 14 only)) (see part M), you fail to include all information required to be shown on the statement, or you include incorrect information on the statement.”

Once you see the penalties associated with the failure to provide Copy B on time or failure to provide a correct payee statement, you can understand that calling that business or individual directly is a kinder way of getting the data.