By: Tanya Baber, EA
Overview of 1099 Reporting
Information reporting faces several important hurdles: it is commonly misunderstood, the requirements for reporting often change, and new legislation and requirements are constantly being passed, all of which lead to confusion.
IRS code sections 6042-6050 describe the reporting required if engaged in trade or business. Specifically, code 6041 requires information returns to be made by persons making payments over $600 in the course of trade or business.
For clarity, the term "information returns" refers to records of payments. A 1099 is an information return, as is a W-2.
Legislation has frequently impacted 1099s, especially in recent years. A few examples of such legislation include:
- 2010: The patient Protection and Affordable Care Act was repealed in 2011 because of the burdensome reporting requirements for ALL business expenses. Even the IRS demanded the repeal because they could not keep up with the paperwork.
- 2010: Small Business Jobs Act targeted rental property owners and demanded they issue 1099s to all service providers. This law also significantly increased penalties to force compliance.
- 2015: Trade Preferences Extension Act Update increased penalties again, doubling almost all of them.
- 2016: Omnibus Appropriations Act required earlier due dates that came into effect in 2017.
Tanya predicts that penalties will continue to increase over time in an effort to force compliance among taxpayers.
Purpose of Reporting
Why is 1099 reporting so important? Because of The Tax Gap, a major statistical endeavor that shows the difference between taxes owed and what is actually paid. The last Tax Gap was issued in April 2016 and covered 2009-2010. A new Tax Gap is released roughly every ten years, but not much change has been seen over each decade.
The Tax Gap creates a large chart that indicates areas of noncompliance. Underreporting represents the largest chunk of the Tax Gap, at $387 billion. Comparatively, nonfilers account for only $32 billion.
In 2009-2010, $2.35 trillion was paid in taxes. The Tax Gap showed $458 billion, equating to about 81.7% compliance. 84% of that Tax Gap is underreporting.
When information is reported on W-2s, there is a 99% compliance in tax payment. Without a W-2, there is a 56% misreporting rate.
Rightfully so, the IRS has concerns that all income is not reported. Their answer to solve this problem is to increase penalties to ensure more compliance. This is where 1099 reporting comes in.
Deadlines When to File
It's essential to familiarize yourself with the deadlines for reporting. W-2s and 1099-MISC box seven forms are due to both the payee and the IRS by January 31. If January 31 falls on a weekend or holiday, the due date is the next workday. The electronic filing due date is March 31.
The reporting deadlines do come with some extension options. You can use Form 8809 for extensions on W-2s, 1099-MISC, and a variety of 1099 forms. An automatic extension of 30 days applies. If you file Form 8809 before the due date, you can file for another 30-day extension due to hardships like illness, casualty, or first year in business.
How and Where to File
The electronic filing must be complete by March 31, except for 1099-MISC box seven and W-2s, which are still due on January 31.
You can file using the FIRE system (Filing Information Returns Electronically) located at http://fire.irs.gov.
IRS Publication 1220 details the requirements and procedures to file.
The IRS is moving to electronic filing in an effort to combat fraud. Nearly all returns are required to be filed electronically.
If you file more than 250 information returns, you MUST file electronically, or you will be penalized PER return. You can expect this threshold to decrease to force electronic filing in the future.
Form 4419 is the Application for Electronically Filing, and you will need to fill it out at least 30 days before the due date to allow ample time for processing.
You can request a hardship waiver from the electronic filing requirement by filing Form 8508, but you will want to fill it out at least 45 days before the due date.
Remember that paper forms are scanned, so you MUST adhere to the proper preparation of forms for them to be accepted. This means no special characters, Copy A must be sent even if it is blank, a proper Copy A, and the Full ID must appear for the IRS for filing purposes. All forms must be sent in a flat mailer with no staples, folds, or tears.
The addresses used for filing are:
- Austin, TX 73301
- Kansas City, MO 64999 (new PO Box)
- Ogden, UT 84201 (new)
Where you will send the forms is based on the taxpayer's address.
If you are sending many forms, separate the forms into multiple packages for easy handling and number the packages individually (1 of 4, 2 of 4, and so on and so forth).
Paper filings must be sent by First-Class Mail or accepted delivery service listed on the IRS website.
Who Gets a 1099 and Exceptions
The generally accepted rule is that a 1099 must be issued to a trade or business that received over $600 in total for the year, that is non-corporation.
Corporate exceptions include:
- Medical and Health Payments
- Broker and Barter Transactions
- Cancellation of Debt
- Federal Withholding or Foreign Taxes
- Fish Purchases
- Merchant Card/Third Party Payments
All of the above exceptions must file 1099s.
Dollar exceptions (if more than $10/year) include:
- Retirement Income Payments
- Distributions from Cooperatives
All of the above exceptions must be reported on 1099s if over $10 for the year.
Dollar exceptions (of any dollar amount) include:
- Abandonment of Property
- Broker and Barter Transactions
- Health Credit Advance Payments
- Long-Term Care
- 529 Plans
- HSA/MSA Plans
- Fish Purchases
So, in reality, the $600 "general rule" only applies to 1099-C (Cancellation of Debt), 1099-MISC, and 1099-S (Certain Real Estate Transactions). But because 1099-MISC box 7 is the most common form of 1099 reporting, the $600 rule has become understood to be the "general rule."
Employees should NOT get 1099 forms for:
- Per Diem
- Gift Cards
These should be accounted for on their W-2, with the only statutory exception being director fees. If an employee sits on the Board of Directors, they should receive a W-2 for their wages and a 1099-MISC for their director fees.
Keep in mind that this webinar is only the introduction to 1099 Reporting, with additional webinars to cover additional information. Be sure to follow up on future webinars to familiarize yourself with all of the nuances and requirements of 1099 reporting.