With the end of the year fast approaching, now is the time to get ready to file your Form 1099-MISC. The rules are complex and failure to comply will result in penalties, and if audited, lost deductions (which can result in more penalties and interest assessments).
The IRS really wants to make sure all the information (provided by individuals, unincorporated businesses, and incorporated & unincorporated legal practices on a completed Form W-9, which can be obtained at www.irs.gov/pub/irs-pdf/fw9.pdf) on 1099s are accurate and filed on time. In addition to penalties for errors on forms, the IRS fines for late forms, missing forms, wrong or missing taxpayer information, and not filing electronically when you should have. Here are the penalties to be aware of:
Late forms or uncorrected errors. The IRS imposes penalties for failure to file information returns with the IRS on a timely basis (as well as the failure to furnish returns to payees on a timely basis). In addition, the IRS may also assess penalties if a filer fails to include all the information required to be shown on a return (e.g., taxpayer’s TIN) or reports incorrect information (e.g., incorrect dollar amount).
The penalties for the 2019 tax year are:
- $50 per form ($556,5000 max) if filed within 30 days of the deadline;
- $110 per form ($1,669,500 max) if filed more than 30 days after due date but by August 1; and
- $270 per form ($3,339,000 max) if filed after August 1.
The IRS reduces max fines for each tier to $194,500, $556,500 and $1,113,000, respectively for filers that are small businesses with less than $5 million in gross receipts for the past three years.
Missing forms due to intentional disregard. The penalty has been increased to $550 per form if a filer neglects to send forms altogether (to either the IRS or the payee) when the filer knew it should have (what the IRS classifies as “Intentional Disregard”). This penalty has no maximum — yikes!
Filing date when nonemployee compensation (NEC) payments are reported in box 7. If you are reporting NEC payments in box 7, using either paper or electronic filing procedures, Section 6071(c) requires you to send the Form 1099-MISC to the recipient and to the IRS by or before January 31. For all other reported payments, send the payee’s copy of the Form 1099-MISC by or before January 31, and the IRS copy by the end of February, if you file on paper, or March 31, if you file electronically.
Form 1099-MISC filing requirements. The Form 1099-MISC reporting rules apply to any business (whether a sole proprietorship, partnership, or corporation) that makes a reportable payment in the course of its trade or business.
Form 1099-MISC is used to report fees, commissions, and other forms of compensation or income paid for services performed by partnerships and individuals who are not employees. Payments to corporations (including S corporations) need not be reported unless the payments are for gross attorney fees.
Form 1099-MISC (Miscellaneous Income) is filed for each payee that received—
- at least $600 in rents (box 1), medical, health care, and veterinary services (box 6), services (including reimbursement for material and supplies) to individuals or unincorporated businesses (box 7), other income payments such as prizes (box 3), or at least $10 in royalties (box 2);
- gross proceeds of $600 or more paid to any attorney whether incorporated or not (box 7 or 14).
To emphasize, the exemption from issuing Forms 1099-MISC for payments to corporations (discussed above) does not apply to payments for legal services. Therefore, attorney fees paid to corporations that provide legal services must be reported on Form 1099-MISC in box 7 or if paid as part of legal settlements, box 14.
Forms 1099-MISC are not required to be filed or furnished to a payee if total payments during the calendar year are less than the minimum reporting requirement of $600. However, the payer may choose to furnish a Form 1099-MISC for all payments (even those under the minimum filing requirement), and the IRS encourages payers to do this.
Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the payee. Examples of payments for which a Form 1099-MISC is not required include the following:
- Payments made to a corporation.
- Payments for merchandise, telephone, freight, storage, and similar payments.
- Payments of rent to real estate agents or property managers.
- Payments to contractors with a credit/debit card or via PayPal or similar merchant payment processing services. These transactions fall under the 1099-K rules.
A payment made to a payee in the form of virtual currency is subject to information reporting to the same extent as any other payment made in property and is reported at the virtual currency’s fair market value (measured in U.S. dollars) as of the date of the payment. Thus, a payment made in virtual currency that is required to be reported on Form 1099-MISC (e.g., a payment made to an independent contractor for services performed) must be reported using the fair market value of the virtual currency as of the date the amount was received by the independent contractor. The backup withholding rules apply to payments made in the form of virtual currency to the same extent as any other payment made in property.
A comprehensive list of reportable payments and the proper form to report each type of payment is available in the 2019 General Instructions for Certain Information Returns (available at www.irs.gov/pub/irs-pdf/i1099gi.pdf).
In closing, payers file specific information returns depending on the type of reportable payments made to recipients. This letter provides a brief overview of the Form 1099-MISC reporting requirements. Pugh CPAs is ready to assist with your compliance and filing deadline requirements.
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