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What are information returns?

October 29th, 2009 No comments

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.

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Why are 1099 forms important?

October 29th, 2009 No comments

If you’re a new business owner, you might not be aware that you need to submit 1099 forms for contractors or professionals that you hire and paid $600 or more to. This includes payments to accountants, attorneys, consultants, freelancers, and other professionals. Several other payments require 1099 form submissions and you can check the IRS’s website for more information on what types of payments need to be reported with a 1099 or other information return.

The penalties for not reporting these payments to the IRS on 1099 forms can be substantial and stiff, so it is best to make sure that all payments that classify as 1099 income are recorded on a 1099 form and sent to both the IRS and the payee by the deadline.

If you are a new freelancer or contractor, you might receive a 1099 form in the mail around the end January. If you’ve never seen a 1099 form you might be surprised that your client would report the income you received to the IRS. Many new freelancers or moonlighters are unaware that they must report this type of income. The 1099 form was sent because you were paid more than $600 by your client.

The IRS requires that all of your gross income is reported, including payments received while freelancing and moonlighting. Even if the payment to you was less than $600, it is still required to be documented and included on your tax return. It is a potentially devastating mistake to not report 1099 income on your taxes, because the IRS can easily note the discrepancy between the 1099 income your clients reported to the IRS and the income you claimed on your taxes.

So, when it comes to reporting 1099 income, it is best to be safe rather than sorry. Avoid the stiff fines and extra money and time spent being audited by being vigilant and sending all necessary information returns on time. If you are worried about the difficulty of preparing these forms, to make the process simpler you can use 1099 software to help you prepare your 1099 information returns.

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Article Submission

October 29th, 2009 1 comment

Got a story to tell about information returns?

Want to share your knowledge of IRS forms 1042-S, 1096, 1098, 1099, 3921, 3922, 5498, 8955-SSA, W-2G and/or W-2, W-3? Receive worldwide recognition and fame!

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