1099 Tax Software Blog

One of the most frequent uses of Form 1099-MISC is to report payments for services to non-employees or independent contractors.  Those payments are listed in box 7 of the 1099-MISC for annual amounts of $600 or more.  It is the payer who makes this determination of the work relationship, and there are tests the IRS uses to classify employees vs. independent contractor.  The most important of these is that the IRS presumes that work performed is part of an employee relationship, and the payer may have to demonstrate why they are treating the worker as an independent contractor.

Employee vs. Independent Contractor Relationships

According to the IRS instructions for 1099-MISC, the basic tests used to define the employee relationship center around behavioral control, financial control and relationship of the parties.  Behavioral control means that a worker receives extensive instructions on how to perform the work, as well as specific training.  Financial control is determined by the worker’s own investment in the work, and the potential to realize a profit or loss.  In other words, if their services are part of a broader work scheme that they own and operate, then they may be contractors and not employees.  Finally, the relationship between the parties may be ultimately determined by the nature of the contract that is used, and evidence of control and employee status contained in the contract terms.

The Process of Determining Status

Form SS-8 is used by workers who request to have their work status determined by the IRS, if the worker feels that they are actually in an employment relationship.  Some workers may feel unfairly excluded from the employee status, and the benefits that go along with it.  The form has many questions that pertain to the issues of control and the nature of the work relationship, and as mentioned the business has to overcome the presumption that the worker is an employee.

The advantage for a business in paying independent contractors is that they can avoid paying the employer portion of Medicaid and social security for the worker.  If the worker is self-employed, they pay the entire amount as self-employment tax.  Also, independent contractors are not entitled to any benefits such as health or disability insurance, so a business can realize savings in this area as well.

However the IRS does scrutinize this relationship and will make a determination either on its own as part of an audit or at the request of the worker.  Any business that claims workers are independent contractors would be well served to have a personal services contract that clearly defines the relationship.

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.