1099 Tax Software Blog

The Small Business Jobs Act of 2010 increased penalties for filing 1099 information returns late, furnishing incorrect payee copies and failing to file.

The penalty for each information return filed January 1, 2011 or later are:

Filing late…

• $30 per information return if the payer correctly files within 30 days.  The maximum penalty is $250,000 per year (an outrageous sum!).  For small businesses, the maximum penalty is $75,000 per year.
• $60 per information return if the payer correctly files more than 30 days after the due date but by August 1.  The maximum penalty is $500,000 per year (again, an outrageous sum!).  For small businesses, the maximum penalty is $200,000 per year.
• $100 per return if the payer correctly files after August 1. The maximum penalty is $1,500,000 per year and $500,000 per year for small businesses.

Failure to Furnish Correct Payee Copies…

Copy B is sent to the payee.  Here, the maximum penalty for failure to furnish a correct payee statement is $1,500,000 per year and $500,000 per year for small businesses.  The penalties may be reduced if:

• Reduced $30 per return if the incorrect Copy B is corrected within 30 days after the due date.
• Reduce to $60 per return if the incorrect Copy B is corrected on or before August 1.

Failure to File…

Failing to file machine readable paper forms or intentional disregard of the 1099 filing requirement is $250 per return for all filers. There is no maximum amount for this penalty.

These penalty amounts will be adjusted annually for inflation.

Needless to say, the failure to file yields the highest penalty.

We with work with alot of companies each year.  The deadline for efiling is April 1 but you can apply for and will be automatically granted a 30-day time extension taking the due date to May 1 (or 2).  Even in May and June, we are still efiling on behalf of businesses.  Even if your late, take the time to prepare quality data and file. All of these penalties use the word “may”.  You may be subject to this penalty.  We have worked with many businesses who have filed extremely late the past few years but have not received a penalty.  Maybe a penalty will eventually come but its possible enough time will pass and the IRS will not take any action.

You can request more time to file any information return.  Its easy to do and you will automatically receive an additional one month time extension.

Its important to remember that you can attain an automatic 30-day extension for filing Copy A by paper or electronically with the IRS (or SSA if you are filing Form W-2).  This extension option does not give you additional time to distribute Copy B to the payees. You can not request additional time for distributing Copy B.

The steps are below:

1. Log into the IRS FIRE System.  Click on Continue to reach the main menu.
2. At the main menu, click on “Extension of Time Request”.
3. You will see four (4) options.  Click on “Fill-In Extension Form”.
4. Click Continue.
5. You will see a form that asks various questions.  You select how the information returns will be filed, whether by paper or electronically.  You select which types of returns you are requesting more time to file.  The return types include W-2, 1098/1099/W-2G, 5498, 5498-SA, 5498-ESA, 1042-S and 8027.

While the W-2 is filed with SSA, you can select a time extension through the IRS FIRE System.

You also type in the payer TIN, name, address, city, state, zip code, contact name, phone number and transmitter control code (if applicable).  If you dont have a TCC number, you can leave that box blank.  You also select whether this payer address is in a foreign country.  If you select no (which is the default), then the payer resides in the United States.

Click Submit and a 30-day time extension will automatically be granted.

We can efile a 1-month extension on your behalf.  We do charge for that service.  Just contact sales at (480) 460-9311 and they can file that extension for you.

The 1099 IRS forms or information returns are used to report a wide variety of income to the IRS.  Each 1099 IRS form is followed by a few letters to describe the type of information that is being handled:

• Form 1099-A reports acquistion or abandonment of secured property.
• Form 1099-B reports the sale of stocks, bonds, mutual funds and other securities.
• Form 1099-C reports the cancellation of debt.
• Form 1099-CAP reports change in corporate control and capital structure.
• Form 1099-DIV reports dividends, qualified dividends, and capital gains distributions.
• Form 1099-G reports payments from state governments such as unemployment compensation and state tax refunds.
• Form 1099-INT reports interest income earned.
• Form 1099-K reports merchant card and third-party payments.
• Form 1099-LTC reports long term care and accelerated death benefits.
• Form 1099-MISC reports various types of miscellaneous income including rents, royalties, and non-employee compensation.
• Form 1099-OID reports original issue discount income.
• Form 1099-PATR reports patronage dividends paid by a cooperative.
• Form 1099-Q reports payment from qualified education programs (under sections 529 and 530).
• Form 1099-R reports distributions from a retirement plan such as an IRA, 401(k) or pension.
• Form 1099-S reports proceeds from the sale of real estate.
• Form 1099-SA reports distributions from an hsa, archer msa or medicare advantage msa.

The 1098 series consists of:

• Form 1098 reports mortgage interest.
• Form 1098-C reports contributions of motor vehicles, boats and airplanes.
• Form 1098-E reports student loan interest.
• Form 1098-T reports tuition.

The 5498 series consists of:

• Form 5498 reports IRA contributions.
• Form 5498-ESA reports Coverdell ESA contribution information.
• Form 5498-SA reports HSA, Archer MSA or Medicare Advantage MSA information.

Other information returns are:

• Form 1042-S reports foreign person’s us source income subject to withholding.
• Form 1097-BTC reports bond tax credit.
• Form 8027 reports employer’s annual information return of tip income and allocated tips.
• Form 8955-SSA is an annual registration statement identifying separated participants with deferred vested benefits.
• Form W-2G reports certain gambling winnings.
• Form W-2 and W-3 reports wages to Social Security.

The list keeps growing.  IRS Form 1099-K is a new form that started in 2012. In 2011, the IRS created IRS Form 3921 and 3922 which reports which employees receive stock upon exercise options.

Form 1099-B is an information return that the Internal Revenue Service requires to be filed for the gross proceeds of the sales of option shares in non-retirement accounts minus or including a contingent deferred sales charge (CDSC) and redemption fees.  Most commonly, mutual fund withdrawals and stock sales are reported with Form 1099-B.  However, several other stock related transactions should be reported on Form 1099-B.  Form 1099-B is not used however to report capital gains or losses.  The 1099-B information return is used to complete Schedule D on Form 1040 which requires the reporting of option shares.

Generally an employee’s broker will complete the 1099-B after the sale of option shares and send it to the payment recipient.  The broker may choose to report the transaction amount including transaction fees or excluding transaction fees.  If the broker chooses to report the proceeds including transaction costs, the person receiving the 1099-B form should add the fees to their cost basis on their Schedule D.

IRS Form 1099-B consists of 3-pages with 2 forms per page.  Copy A is a red-ink form that the broker can paper file with the IRS.  Do not download Copy A from the Interal Revenue Service website and print and submit.  Even if your printer can print in a red-colored ink, it’s not the same ink that the IRS uses to create Copy A.  The official printed version of the IRS form is scannable, but the online vrsion of it, printed from a website, is not. A penalty may be imposed for filing forms that can’t be scanned. Copy B can be printed on plain paper with black ink and is sent to the recipient.  Copy C is retained by the broker.

For brokers, each recipient of option shares must receive a 1099-B.  The form must be sent by the broker to the payment recipient by January 31 of the year after the calendar year in which the transactions being reported occurred.

Form 1099-B must be paper filed to the IRS by the end of February along with Form 1096, Annual Summary and Transmittal of U.S. Information Returns.  If you file electronically, you have until the end of March.  You can go online and file for an extension taking the due date to the end of April if you need more time.

If the recipient of the proceeds is a nonresident alien, you may have to withhold federal income tax.

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.

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.

An information return is a document that must be filed to update the IRS about wage and non-wage related business transactions and income for individuals, businesses, families, estates, partnerships and trusts. It does not specifically determine a tax liability, but allows for the assessment of earnings that might be relevant to such a liability.

Information listed on the return could include such earnings as interest payments and dividends, payments to subcontractors and changes in tax status, such as alterations in the makeup of a household (a marriage, the addition of new dependents, etc.). Copies of the return must be sent to the recipient of the income. Failure to file an information return can result in penalties and a higher tax liability down the road.

Information returns are necessary for a wide variety of additional transactions and earnings, including accelerated death benefits, broker transactions, advance earned income credit, fish purchases, agriculture payments, golden parachutes, allocated tips, annuities, attorney fees, employee awards, bonuses, awards, barter exchange income, employee car expenses, charitable gift annuities, crop insurance proceeds, education loan interest, insurance services, and many more.

Forms must be filed to report contributions of motor vehicles, boats, and airplanes, tuition related expenses reimbursements and government payments such as unemployment compensation, and tax refunds. Changes in corporate control and capital tax structure for a company also bears filing an information return.

IRS rules for information returns stipulate minimum proceeds necessary to mandate filing for a variety of transactions. For example, mortgage interest, student loan interest, and cancellation must be filed at a rate of $600 or more. Dividends and distributions, interest income, unemployment insurance and payments must be filed at $10 or more. Death benefits, health coverage tax credit payments, exercise of stock options, acquisition of abandoned property, and cancellation of debt, must be filed at all amounts.

Each type of transaction has its own form associated with it, and they are due at different times. This makes organizing and tracking information return filings a complex task. Most companies use an automated system to arrange returns and, where possible, file electronically. This can be done using our software at http://www.1099fire.com

At the Main Menu, you can check the File Status as follows:

1. Click on “Check File Status”.

2. Enter your TCC and TIN

3. Click “Search”.

If the file status indicates:

“Not yet processed”. Then you just need to wait and check back in a few days. Typically, a file will be reviewed within 1-2 days, but there may be delays.

“Good, Not Released” and you agree with the “Count of Payees”, you are finished with this file. The file will automatically be released after 10 calendar days.

“Good, Released”. Then the file has been released to the IRS for processing.

“Bad”. Then the file has errors and was not processed. Click on the file name for a list of the errors associated with that file. There is a lot of information on our website www.1099fire.com that lists out common errors and solutions, including this popular link:

http://www.1099fire.com/learning_center/fire/errors_and_solutions/index.htm

Correct the errors and resubmit the file as a “replacement” in a timely manner. Call or e-mail technical support (support@1099fire.com) if you have any questions.

Now, lets say you transmit a file to the IRS and it comes back as “Good” and was successfully processed by the IRS/ECF-MTB. But later find that the file contained erroneous information. Then you need to put together a file that contains just the corrected information returns and submit that file as a “corrected” file.

If your corrected file is “Bad”, correct the file and resubmit as a replacement, not another correction.

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.

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.