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Test, Original, Replacement and Corrected File Types

November 2nd, 2009 No comments

There are four types of files that you submit to the IRS FIRE; a test, original, replacement and corrected file.

Testing season lasts from November 1 to February 15. You are not required to submit a test file, but its a great way to get some experience with the electronic filing process for information returns.

An original file is an information return that has never been reported.

If you file something and it comes back as BAD, then click on that file name to reveal the errors associated with that file. Correct those errors and submit a replacement file.

If you file something and it comes back as GOOD, then the file has been processed. Let’s say later you discover that some of the records contained erroneous data. You need to submit a corrected file which contains just the records that need to be corrected. If you filed 400 1099-MISC records and found out later that 25 of those records contained incorrect data, then you need to put together a corrected file of just those 25 records and submit.

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Who can and who must participate in IRS FIRE

November 2nd, 2009 No comments

The IRS says “any filer of information returns may file their returns electronically”. In the past (2008 and earlier), this was true. What has changed for the 2009 tax season is that you must have a Employer Identification Number (EIN) to apply for a TCC number and not a Social Security Number (SSN). The EIN is a unique nine-digit number used by businesses that operate in the United States. Any business entity (which includes, sole proprietors, corporations, partnerships, non-profit organizations, trusts and estates and government agencies) may apply for the TCC number which lets you then transmit returns electronically, but not individuals via a SSN.

Publication 1220 states on page 6 that “any person, including a corporation, partnership, individual, estate, and trust, who is required to file 250 or more information returns must file such returns electronically”. This 250 requirement applies separately to each type of form that you are required to file.

Lets consider two examples. Say you file 400 Forms 1099-MISC and 50 Forms 1099-A. Then you must file all of the Forms 1099-MISC electronically but you are not required to file Forms 1099-A electronically.

Of the 400 1099-MISC forms that you filed electronically, lets say you need to file 75 corrections. You can file those corrections by paper because the number of corrections for Form 1099-MISC is less than the 250 filing requirement. If you filed 250 or more Forms 1099-MISC corrections, then those must be filed electronically.

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IRS 1099-MISC Form for Contract Workers

October 30th, 2009 1 comment

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.

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.

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How can I get the red-ink IRS forms for FREE?

October 30th, 2009 No comments

Its easy!!!

There are lots of companies on the web that sell the forms for a pretty penny. Anywhere from $23 for 100 forms and up.

You can attain the forms absolutely for free. No cost. Not even for shipping and handling by ordering the forms from the IRS.

By Phone

You can order as many forms as you like 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 they will ship up to 100 forms per call.

Online

You can also order the forms online by following this link:

http://www.1099fire.com/order_forms_free.htm

It takes anywhere from 3 days to 2-weeks to receive the forms.

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Categories: Basics Tags: ,

How W-2 Forms Work

October 29th, 2009 No comments

W-2 forms are a type of information return that documents wage earnings. Wage earnings are earnings paid by employers to workers who are considered employees by the Internal Revenue Service. These earnings are separate from non-wage earnings that are paid to contractors or freelancers. Non-wage earnings are reported with 1099 forms.

W-2 forms are first sent by employers to the Social Security Administration, where they are processed and sent to the IRS. W-2 forms are also sent to employees for their own tax information and returns. An employee will receive one W-2 form for each company that he or she worked for during the year. There is usually more than one copy provided so that the employee can keep the information for record keeping purposes and also submit copies to the federal and state revenue services. Employers are required to submit W-2 forms to employees by February 2nd and to the SSA by March 2nd.

Employers are required to know how to fill out W-2 forms for each employee. The W-2 form has 20 boxes that record income related information and it also includes identifying information on the employee and employer. Here are the first 10 boxes with a short explanation of the information included in each one.

1. Wages, tips, and compensation – the total payment that the employee received during the year minus pre-tax contributions.

2. Federal income tax withheld – any income taxes withheld from the employee’s earnings.

3. Social security wages – the full amount of the employee’s income that is taxed for social security.

4. Social security tax withheld – the amount of social security tax withheld from the employee’s earnings.

5. Medicare wages and tips – the full amount of the employee’s wages and tips that are taxed for Medicare.

6. Medicare tax withheld – the amount of Medicare tax withheld from the employee’s earnings.

7. Social security tips – any tips that the employee earned.

8. Allocated tips – tips that are allocated to an employee based on IRS rules for tip reporting.

9. Advanced EIC (earned income credit) payment – the amount of payment advances given to the employee.

10. Dependent care benefits – the amount deducted from wages for dependent related care such as day care.

W-2 forms have 10 more boxes that cover other types of income documentation. W-2 form preparation can be quite time consuming by hand. It is much easier and faster to prepare W-2 forms by using software.

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The Difference Between Contractors and Employees

October 29th, 2009 No comments

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.

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When should you submit 1099 form?

October 29th, 2009 2 comments

1099 forms are a type of information return that record different types of taxable income. The Internal Revenue Service requires 1099 forms to be submitted before the end of the tax year to both the IRS and the payment recipient(s). 1099 forms are used to report non-wage payments, or payments that are not considered W-2 wages, and several other types of payments and income.

There are several circumstances in which a person or business should submit a 1099 form to the IRS and payee. The 1099-MISC form covers many types of payment while other variants cover other specific types of payments that the 1099-MISC does not.

For most payments that the 1099-MISC form covers, the minimum amount necessitating reporting is $600 or more. However, there are exceptions including any substitute dividends, royalty payments, and tax-exempt interest that are more than $10. Any payment to attorneys, members of a fishing boat crew, or payee subject to backup withholding must be reported on a 1099-MISC form. If a person or business has paid a doctor, accountant, or other professional $600 or more for consultation or services, they should submit a 1099-MISC form to both the service provider and the IRS.

Some of the other payments that require a variant of the 1099 form include any interest income, distributions from IRA and pension plans, distributions from medical and health savings accounts, barter exchanges, and others. Since there are a wide variety of payments that require a 1099 form submission, it is best to call the IRS or check their website whenever there is a question about whether or not a 1099 form should be submitted.

Any payment to a freelancer or contractor that is more than $600 must be reported with a 1099 form. A potentially difficult part of the process of information reporting is determining whether a hired worker is considered by the IRS an employee or contractor. In the case that the worker qualifies as an employee, a W-2 form would be submitted to the employee and IRS. If there is a doubt, an IRS Form SS-8 may be submitted in order to receive an official decision by the IRS on the classification of the worker.

As a general rule, 1099 forms must be submitted to the taxpayer by January 31st, and to the IRS by February 28th. The form may be submitted to the IRS electronically to save time. If a business or individual has 250 or more 1099 payees in one calendar year, the forms must be submitted electronically to the IRS.

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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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