IRS updates backup withholding CP2100 and CP2100A notices

IRS updates backup withholding CP2100 and CP2100A notices

On November 14, 2019, the IRS issued a statement that they had redesigned the CP2100 and CP2100 notices and given them a new look.  The new notices were updated to provide additional information to companies that file information returns like From 1099-MISC.  The additional information added includes:

    • the types of taxpayer identification numbers issued
    • guidance on which “B” notice to use
    • instructions on how and when to send “B” notices
    • direction on how to validate TINs
    • information on when to stop backup withholding
    • next steps after receiving a notice

The IRS typically sends out these notices (CP2100 is sent to large and midsize filers. CP2100A is sent to small filers) to companies in October and again in the following April.  The notices inform companies that they might be responsible for 24% backup withholding on all 1099s filed with the IRS that had TINs not found in the IRS database or with an incorrect name/TIN combination.  The CP2100 or CP2100A notice will list the payees from the 1099s submitted that had one of these issues.  The company should follow the “B” notice requirements in IRS Publication 1281.

For additional information see Publication 1281.

IRS Proposes NEW 1099-NEC form PLUS best practices for managing W-9 forms.

I recently had the pleasure of joining Debra Richardson on her weekly podcast to discuss the new proposed Form 1099-NEC form and best practices for managing the W-9/1099 form process. The IRS is looking to bring back Form 1099-NEC, last seen in 1982! They are looking to see nonemployee compensation payments reported separately on Form 1099-NEC and no longer in box 7 on Form 1099-MISC. Join us as we discuss the potential consequences of this change and how companies should be prepared.

We also talk about the best practices for managing the Form W-9/1099 process using W9manager. The goal at W9manager is to help companies complete their process each year before the season even starts. We all have better things to do in January! I encourage you to make your commute productive and learn while you drive!

Debra Richardson is an expert on managing the accounts payable process efficiently and securely. If you need expert advice in the payables area or just want to learn more, visit her site at www.debrarrichardson.com.

IRS Proposes Big Changes to 1099 Forms

New draft Form 1099-NEC

The IRS has proposed making big changes to 1099 forms by reviving Form 1099-NEC.  They just recently posted a proposed draft Form 1099-NEC.  Note that a draft IRS form is typically issued by the IRS to solicit comments from the public for a defined period of time.  The IRS generally does not release draft forms until they believe that all needed updates have been incorporated, however, sometimes unexpected issues arise, or legislation is passed.  Drafts of forms and their related instructions often have some changes before their final release.  Once all comments are received the IRS reviews the form, makes any necessary updates, and then issues the final form after receiving OMB approval.   At present, Form 1099-NEC will not be ready for use until calendar year 2020 with filing due dates starting in January 2021. 

What is nonemployee compensation?

The IRS defines nonemployee compensation (NEC) in the 2019 Instructions for Form 1099-MISC.  If the following four conditions are met, you must generally report a payment as NEC.
    • You made the payment to someone who is not your employee.
    • You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
    • You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
    • You made payments to the payee of at least $600 during the year.

Not seen since 1982 

Form 1099-NEC last seen in 1982Form 1099-NEC was last seen in 1982 when Michael Jackson released Thriller, the Dow Jones Industrial Average closed at 1046, and the Commodore home computer was launched!  (For more memories from 1982 click here.)  After 1982 the form was replaced with the all-encompassing Form 1099-MISC. 

Background

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) moved the due dates for filing Forms 1099-MISC that report non-employee compensation in box 7 with the IRS up to January 31st.  It had previously been February 28th (paper) and March 31st (electronic) deadlines.  However, the due date for other 1099-MISC reportable payments not reported in box 7 remained due to the IRS by February 28th or March 31st.   This has caused some confusion as companies might have to report two times to the IRS for the same payee unless they file everything on January 31st. The main reason the IRS filing deadline was moved up to January 31st was to help the IRS combat fraud.   Companies were required to send employees their W-2 and non-employees their 1099-MISC by January 31st.  However, the companies were not required to file with the IRS until February 28th (paper) and March 31st (electronic).  This left a window open where refunds could be issued before the IRS could confirm reporting income. Filers have also run into some issues with the IRS if they file late box 7 1099 forms together with on-time non-box 7 1099 forms after January 31st.  All the forms, including the non-box 7 1099 forms, could be considered late and subject to penalties.

Conclusion

There is no immediate impact from the proposed draft form as companies will not start reporting on the new Form 1099-NEC until January 2021, if approved.  However, if a final form is issued, companies will be required to report all NEC payments in box 1 on Form 1099-NEC rather than in box 7 of Form 1099-MISC.   Payments made for direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale will be reported in box 2 of Form 1099-NEC.   All other payments currently reported on Form 1099-MISC will continue to be reported as done previously.   For the typical standard main street company, I think this will initially make the 1099 process substantially more confusing and time-consuming.  Currently, most companies can just report everything to the IRS on January 31st at one time if they plan ahead.  Payees then just receive one 1099-MISC form.  Now almost every company will have to issue both 1099-MISC and 1099-NEC forms and many of their payees will receive both forms.  In addition, smaller vendors and independent contractors will have never seen Form 1099-NEC, causing even more confusion.   The best course of action is to fully understand the new process,  plan ahead for the changes, and clearly communicate the change to your vendors and independent contractors when you issue the forms for the first time.

Draft IRS instructions

Here are the new IRS instructions currently listed on the draft Form 1099-NEC for additional reference. Box 1. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 1 may show cash you received for the sale of fish. If the amount in this box is self-employment (SE) income, report it on Schedule C or F (Form 1040 or 1040-SR), and complete Schedule SE (Form 1040 or 1040-SR). You received this form instead of Form W-2 because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report this amount on the line for “Wages, salaries, tips, etc.” of Form 1040, 1040-SR, or 1040-NR. You also must complete Form 8919 and attach it to your return. If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report this amount on the “Other income” line of Schedule 1 (Form 1040 or 1040-SR or Form 1040-NR)

Use W9manager to streamline your entire process

W9manager.comW9manager was built to help you complete most of your 1099 work before the season even starts.
    • Request electronic W-9s from vendors with automated reminders
    • Give anyone in your organization access to request W-9s and receive them back centrally
    • Track all outstanding W-9s that you haven’t received
    • Receive W-9s that are done right, as vendors and independent contractors use our step-by-step process to create W-9s
    • Know what vendor payments are reportable on a 1099-MISC using our guided process
    • Stop sending paper 1099s when vendors opt-in for electronic reporting
Try W9manager for free for 14 days at W9manager. Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.  

Form 1099 penalties are ridiculously high. What you must do NOW to avoid them.

Implement strong procedures today, don't wait until year-end.

I know the deal, having been a controller for 20 years. You got through the 1099 season and said to yourself, “we can’t spend this much time and do it this way again next year!” But then your attention turns to the annual audit, and then an acquisition, and then a system conversion, and then a staff shortage, and before you know it, January is here again. Your focus turns toward issuing the year-end financials so you delegate the 1099 job to someone on your staff, hoping that you can do a quick review of the work and then move on. Your staff runs into the typical issues again; misfiled, incorrect and missing W-9s.  They aren't able to get a W-9 for some vendors with no contact information.  In addition, there isn’t a really good process to determine what payments should be 1099 reportable that you can review and feel comfortable with. You start with your work from last year, but was that really correct? You spend more time than you want, pull together a list of reportable payments that you hope is correct and file the 1099s the last week of January. The risk of audit seems low, so you move on.

Understand the IRS's new focus on Form 1099 audits

Materiality works in a lot of areas, however, when it comes to 1099s it is not advised. The IRS is no longer playing around in this area. Several years ago, the IRS issued a memorandum that updated their employment audit procedures to include a review of information returns.  The memorandum states that IRS examiners must now “address whether the appropriate information returns were filed for any reportable payments (e.g. Form 1099-MISC…)” during an employment audit. This significant increase in 1099 enforcement came from the Treasury Inspector General’s report titled “Due to the Lack of Enforcement, Taxpayers Are Avoiding Billions of Dollars in Backup Withholding.” If you are audited, it doesn’t take much for penalties and backup withholding assessments to add up. An example is the best way to highlight this. Let’s assume you added 200 vendors during the year and issued 50 1099 forms at year-end.  You were able to get all but ten W-9s from your vendors by January 31st.  However, you didn’t realize that you misclassified five vendors as corporations and forgot that legal settlements paid to an attorney often have to be reported to both the claimant and the attorney.  There were just a few errors, however, they resulted in substantial penalties. IRS 1099 Penalties The final assessment of $50,730 came from just ten vendor payments, with the majority of the exposure related to backup withholding.  Also, consider that the example does not include any interest assessments. Clearly, it is imperative to get a W-9 form from every vendor that is correct and complete.  Secondly, it is important to be absolutely certain what payments are reportable and why.

Know the penalties assessed by the IRS

1099 filing penalties

IRS Proposes Changes to Electronic Reporting Requirements Penalties can be significant and numerous for companies that don’t comply with IRS information reporting regulations. Penalty amount - The amount of the penalty for not correctly filing a 1099 form is based on when you file the correct return. The penalties are as follows for returns submitted late to the IRS:
    • $50 per information return you correctly file within 30 days after the due date; maximum penalty of $556,500
    • $110 per information return you correctly file more than 30 days after the due date but by August 1; maximum penalty of $1,669,500
    • $270 per information return if you file after August 1 or you do not file required information returns; maximum penalty of $3,339,000
    • $550 or more per information return if any failure to file a correct information return is due to intentional disregard; there is no maximum penalty
In addition, the same penalties above are assessed at the same amounts on a failure to provide a correct 1099 statement to the vendor or independent contractor. The penalty for not filing a correct information return with the IRS is separate from the penalty for not providing a 1099 statement to your vendor. You may be subject to a penalty:
    • If you fail to file timely
    • If you fail to include all information required to be shown on a return
    • If you include incorrect information on a return
    • If you file on paper when you were required to file electronically
    • If you report an incorrect TIN
    • If you fail to report a TIN
    • If you fail to file paper forms that are machine readable.
For more information on penalties see the General Instructions for Certain Information Returns.

Backup withholding penalties

Although penalties can be significant, it is the backup withholding assessment that holds the greatest exposure. Backup withholding is an IRS requirement for companies to withhold 24% of a payment to a U.S. vendor in certain circumstances and remit the amount to the IRS. Companies are required to make an initial request for the TIN number (done with a W-9 form) when the first payment is made to the vendor. If the vendor does not provide a W-9 form when you initially ask for it, you must begin backup withholding. If you don’t begin backup withholding when required, you could be responsible for the entire amount that was not withheld. So, if a company pays a vendor $100,000 during a calendar year and does not withhold the required 24%, it could be required to pay the $24,000 in backup withholding itself to the IRS. For more information on backup withholding, see IRS publication 1281, Backup withholding for missing and incorrect name/TINs. 

Implement a plan to reduce your risk of penalties today

There are several ways to limit your exposure to Form W-9 penalties.

Get a W-9 form before every vendor payment

Due to the potential risk of 24% backup withholding being assessed on the ENTIRE amount paid to a vendor, it is imperative that you obtain a W-9 form from every vendor.  Make sure you have an air-tight process in place to ensure you receive a W-9 form prior to the first payment to your vendor.  You should also have a way to track the W-9s requested and follow-up to ensure receipt.  Avoid looking to catch-up on missing W-9s at year-end.   At that point you will find vendors that are no longer in business, don't have good contact information, or won't give you a W-9 to avoid being issued a 1099 form. The exposure from even one missing W-9 form is too great.  In the example above two payments of only $90,000 were assessed $21,600 in backup withholding due to missing W-9s.  If the payments had totaled $500,000, a 24% backup withholding assessment would be $120,000.    Backup withholding costs can be significant and would be an expense to the company as payment to the vendor had already been made. It is also important to ensure that the W-9 forms you receive are complete and correct.   W-9s that are missing the TIN number, name, or signature can be subject to the 24% backup withholding as well.   Mismatches between the name and the TIN number can also result in "B" notices from the IRS.  These notices create additional work and increase exposure to additional penalties.

Ensure a solid understanding of 1099 regulations       

Make sure you have a solid understanding of the IRS regulations for 1099 forms. For each reportable payment that is not reported to the IRS and the vendor, the penalty would be $540 if not caught before August 1st. For more information see the IRS’s Guide to Information Returns and Instructions for Form 1099-MISC (2019).

File electronically when required

If you are required to file 250 or more information returns during the year, you must file electronically. The 250-or-more requirement applies separately to each type of form. However, be aware that the IRS is looking at changing this rule. See our blog article IRS proposes changes to electronic reporting requirements.

File timely

Make sure you follow the IRS guidelines by filing Form 1096 with the IRS and sending Form 1099 to your vendors timely.  See our blog article Avoid the penalty, 1099-MISC due dates for 2020.

Use W9manager to streamline your entire process

            W9manager was built to help you complete most of your 1099 work before the season even starts.
    • Request electronic W-9s from vendors with automated reminders
    • Give anyone in your organization access to request W-9s and receive them back centrally
    • Track all outstanding W-9s that you haven’t received
    • Receive W-9s that are done right, as vendors and independent contractors use our step-by-step process to create W-9s
    • Know what vendor payments are reportable on a 1099-MISC using our guided process
    • Stop sending paper 1099s when vendors opt-in for electronic reporting
Try W9manager for free for 14 days at www.w9manager.com. Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.  

Avoid the penalty, 1099-MISC due dates for 2020

Importance of filing timely

The IRS has gotten serious about 1099-MISC due dates.  Penalties have risen significantly and they apply separately to copies sent to recipients and the IRS.  Companies can face penalties for late filing that can be as high as $540 for each 1099-MISC sent late to a recipient PLUS another $540 for each form not filed timely with the IRS.

RECIPIENT 1099-MISC due dates

You can avoid these late filing penalties by furnishing 1099s to your recipients (i.e vendors) timely.  The deadline to send Forms 1099-MISC for payments made in 2019 is January 31, 2020, if you are reporting non-employee compensation (NEC) in box 7.  This applies to both paper or electronic filing procedures.  For all other reported payments, send Form 1099-MISC by February 28, 2020, if you file on paper, or March 31, 2020, if you file electronically.
1/31/20 - Furnish Copy B of Form 1099-MISC to recipients if you are reporting NEC in box 7. 2/28/20 - Furnish Copy B of Form 1099-MISC to recipients if you are not reporting NEC in box 7 and you file on paper. 3/31/20 - Furnish Copy B of Form 1099-MISC to recipients if you are not reporting NEC in box 7 and you file electronically.   Most payments made by companies are reportable in box 7.  Therefore, a best practice followed by many companies is to simply mail out all 1099-MISC forms on January 31st.  Be certain that you properly address and mail out forms on or before the due date.  If you are filing electronic statements be certain to post the forms to a website on or before the due date.  Also, note that companies with 250 or more information returns are required by the IRS to file them electronically.  This rule applies separately to each type of form. 

IRS 1099-MISC due dates

Forms 1099-MISC be filed with the IRS on or before January 31, 2020 when you are reporting nonemployee compensation (NEC) in box 7.  The due date for Forms 1099-MISC without NEC is February 28, 2020 if filing by paper, or March 31, 2020 if filing electronically.  In practice, most companies file all Forms 1099-MISC on January 31st.
1/31/20 - File Form 1096 and Copy A of 1099-MISC forms that report NEC in box 7.  Due date applies to both paper and electronic filing. 2/28/20 - Paper filing of Form 1096 and Copy A for all other 1099-MISC forms without NEC in box 7. 3/31/20 - Electronic filing of Form 1096 and Copy A for all other 1099-MISC forms without NEC in box 7.

Filing Form 1099-MISC with NEC after 1/31/20

If any of your Forms 1099-MISC reporting NEC will be filed after January 31, 2020, file them in a separate transmission from your Forms 1099-MISC without NEC (due March 31, 2019). Filers should anticipate that if transmissions sent after January 31, 2020, include both Forms 1099-MISC reporting NEC and Forms 1099-MISC that do not report NEC in a single transmission (on paper with a single Form 1096 or electronically through FIRE with a single payer “A” record), the IRS will treat every form in the single transmission as if it is subject to the section 6721 penalty for failure to file by January 31, 2020. The IRS may send you a Notice 972CG, A Penalty Is Proposed for Your Information Returns, to which you may respond and clarify the content of the submission, indicating the number of Forms 1099-MISC that did not report NEC.

Filing an extension

You can request a 30-day extension to furnish Form 1099 to your recipients by sending a letter to the IRS.  Be sure to mail your request by the due date of the form.  For more information see the section, Extension of time to furnish statements to recipients, in the General Instructions for Certain Information Returns.  In addition, you can also request an automatic 30-day filing extension with the IRS by completing Form 8809.

Where to file

All paper information returns will be filed with only two IRS centers.  One is in Austin, TX, and the other is in Kansas City, MO.  See part D of the General Instructions for Certain Information Returns and Form 1096 for more information.  We recommend filing electronically with an online provider like tax1099.com or directly with the IRS using the FIRE system.

State filing

Finally, note that the information above only relates to filing with the IRS.  You may also need to file an information return with your state government.  The state filing requirements may be satisfied with the Combined Federal/State Filing Program.  Through this program the IRS will forward information returns like the 1099-MISC to participating states.  You must file electronically to participate in this program. See Part A. Sec. 11 of IRS Publication 1220 for a list of participating states.  Contact your state for requirements if they are not a participating state. Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

Does a W-9 form have to be signed?

Most companies ask for all W-9 forms to be signed.  However, it is a relatively unknown fact that the IRS does not require most W-9 forms to be signed (or certified.)  The certification instructions on the W-9 form state that generally for “payments other than interest and dividends, you are not required to sign the certification, but you must provide your correct TIN.”   As most companies outside of the financial sector don’t deal with financial transactions, they can reduce the time and effort of obtaining W-9 forms by not requiring a signature.

W-9 forms required to be signed by the IRS

There are three areas where a W-9 form needs to be signed.  Most of these do not relate to payments reported on a 1099-MISC.

Financial transactions

W-9 forms related to the following financial transactions are required to be signed. Interest accounts - bank interest (1099-INT) Dividend accounts (1099-DIV) Barter exchange accounts (1099-B) Broker accounts (1099-B) Original issue discounts (1099-OID) Patronage dividends (1099-PATR) Real estate transactions (1099-S)

"B" notice

The IRS also requires that a signed W-9 form is obtained when a company receives the first “B" notice from the IRS.  A “B Notice” (CP2100/A) is sent by the IRS when the name and the TIN number on a 1099 form issued by a company to a vendor do not match the IRS files or the files of the Social Security Administration.   Companies are then required to obtain a new W-9 form from their vendor and the new W-9 form must be signed.  If a company has not received any of these notices, this signature requirement is not applicable.

FATCA payments

U.S. companies that make payments subject to FATCA rules that are paid to a foreign corporation, insurance company, bank or other related foreign financial institution could be required by the IRS to withhold 30% of the gross payment.  However, this withholding requirement can be avoided if the company receives a signed W-9 form.  By signing the W-9 the signer certifies under the penalty of perjury that they are “a U.S. citizen or other U.S. person.”  This W-9 certification tells the company that FATCA does not apply and the payment is subject to the standard 1099 guidelines.  Note that this applies to payments made in the course of a trade or business. If no documentation is obtained from the vendor, the U.S. company will be required to apply the FATCA presumption rules.   These rules require the company to assume that the vendor is a foreign individual or company and withhold 30%. What is a FATCA payment? FATCA payments are typically financial transactions such as loan interest, stock dividends, financial services fees, annuity payments, and life insurance premiums.  They also include gross proceeds from the sale or other disposition of any property of a type that can produce U.S. source interest or dividends.  The payment is typically made to a foreign corporation, insurance company, bank or other related foreign financial institution.  For additional information visit the IRS's FATCA page.

W9manager

At the start of creating every W-9 form, W9manager asks the question “Is the named individual or entity on this Form W-9 a U.S. citizen or a U.S. person?”  A user can only continue creating a W-9 form if they answer “Yes” to this question.  This adds an additional level of assurance that the person or entity creating the W-9 form using W9manager is a US person.

Best practice

W9manager recommends that companies request an unsigned W-9 unless there is a specific requirement for a signature.  This practice will greatly help speed up the W-9 collection process as anyone in the vendor’s accounting department can complete the W-9 request.   Otherwise, there may be a delay while the accounting department works to get an authorized person to sign the form.  Create and send your own W-9 form using W9manager today!  It’s always free.

Additional references

Listed below are some additional technical reference related to W-9 form signature requirements.

Form W-9 Instructions, Part II. Certification

The instructions for Form W-9 include a specific section related to the signature (certification) requirements. To establish to the withholding agent that you are a U.S. person, or resident alien, sign Form W-9. You may be requested to sign by the withholding agent even if item 1, 4, or 5 below indicates otherwise. For a joint account, only the person whose TIN is shown in Part I should sign (when required). In the case of a disregarded entity, the person identified on line 1 must sign. Exempt payees, see Exempt payee code, earlier.

Signature requirements.

Complete the certification as indicated in items 1 through 5 below.
  1. Interest, dividend, and barter exchange accounts opened before 1984 and broker accounts considered active during 1983. You must give your correct TIN, but you do not have to sign the certification.
  2. Interest, dividend, broker, and barter exchange accounts opened after 1983 and broker accounts considered inactive during 1983. You must sign the certification or backup withholding will apply. If you are subject to backup withholding and you are merely providing your correct TIN to the requester, you must cross out item 2 in the certification before signing the form.
  3. Real estate transactions. You must sign the certification. You may cross out item 2 of the certification.
  4. Other payments. You must give your correct TIN, but you do not have to sign the certification unless you have been notified that you have previously given an incorrect TIN. “Other payments” include payments made in the course of the requester’s trade or business for rents, royalties, goods (other than bills for merchandise), medical and health care services (including payments to corporations), payments to a nonemployee for services, payments made in settlement of payment card and third party network transactions, payments to certain fishing boat crew members and fishermen, and gross proceeds paid to attorneys (including payments to corporations).
  5. Mortgage interest paid by you, acquisition or abandonment of secured property, cancellation of debt, qualified tuition program payments (under section 529), ABLE accounts (under section 529A), IRA, Coverdell ESA, Archer MSA or HSA contributions or distributions, and pension distributions. You must give your correct TIN, but you do not have to sign the certification.

Form W-9 Form, Certification Instructions

The certification instructions detailed on Form W-9 state that “For mortgage interest paid, acquisition or abandonment of secured property, cancellation of debt, contributions to an individual retirement arrangement (IRA), and generally, payments other than interest and dividends, you are not required to sign the certification, but you must provide your correct TIN.”

Instructions for the Requester of Form W-9, Electronic System

The Instructions for an electronic system state “For Forms W-9 that are not required to be signed, the electronic system need not provide for an electronic signature or a perjury statement.”

Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s)

The IRS notes under the First “B” Notice section, page 12, that “it is your responsibility to send the appropriate “B” Notice to the payee, when required, to obtain the correct Name/TIN. This information may not be solicited by telephone. You need a TIN that the payee certifies as correct on Form W-9 in order to stop current backup withholding or prevent backup withholding from starting.”

FATCA Presumption Rules

The Instructions for the Requester of Forms W-8 includes a section that explains the IRS presumption rules.  These rules state that “if you do not receive a valid Form W-8 or Form W-9 that you may rely upon under the due diligence requirements, or cannot otherwise determine whether a payment should be treated as made to a U.S. or foreign person, you must apply the presumption rules provided in the Regulations under sections 1441, 1446, 1471, 6045, and 6049. If the presumption rules are applied to treat a person as a foreign person, the 30% withholding rate applies and cannot be reduced (for example, no treaty rate). You may not rely on the presumption rules if you have actual knowledge that a higher withholding rate is applicable. If you determine that you are making a withholdable payment to an entity and cannot reliably associate the payment with a Form W-8 or other permitted documentation that is valid for chapter 4 purposes, you are required to treat the entity payee as a nonparticipating FFI.” Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. This article is also not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

What is a 1099-MISC form?

The 1099-MISC form is known as an "Information Return"

Form 1099  is one of many forms that the IRS requires to be sent to individuals and entities to report payments made to them during the course of a calendar year.   It is very similar to Form W-2, the most well known "information return," which is used to report wages paid to employees.  The 1099 form, however, is primarily used to report payments made to vendors and payments made to individuals that are not employees.

Form 1099-MISC

There are almost twenty different 1099 forms.  Individuals receive a 1099-INT from their bank for interest paid or a 1099-DIV from their broker for dividends paid.  A 1099-G is sent by state governments to report state tax refunds.   A 1099-S is sent to report proceeds from real estate transactions.   Form 1099-MISC is one of the most used 1099 forms by companies.  It is used by companies to report payments made to their vendors and independent contracts in the course of their business.   However, only specific payments are required by the IRS to be reported. 1099-MISC Form  

Payments reportable on a 1099-MISC

The 2019 Instructions for Form 1099-MISC from the IRS provides a long list of payments that are reportable.   The primary payments that are listed as reportable in the instructions are: Payments of at least $600 in:
    • rents
    • services performed by someone who is not your employee;
    • prizes and awards;
    • other income payments;
    • medical and health care payments;
    • crop insurance proceeds;
    • cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish;
    • generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
    • payments to an attorney; or
    • any fishing boat proceeds.
In addition, From 1099-MISC is used to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment. You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment. Do not use Form 1099-MISC to report employee wages.  Employers use Form W-2 to report wages, tips and other compensation paid to an employee.

Exempt Payees

Once you have determined that a payment is reportable, you then need to look at the tax classification of the person or entity paid.  Many entities, such as U.S. governments or nonprofits, are exempt from 1099 reporting and are not required to receive a 1099-MISC, even if the payment is reportable.  Corporations are also typically exempt from 1099-MISC reporting with the exception of certain medial and attorney payments.

Additional References

For additional help see the 2019 General Instructions for Certain Information Returns from the IRS.

Use W9manager to streamline your entire process

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Try W9manager for free for 14 days at W9manager.com. Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. This article is also not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.  

What is backup withholding?

Under certain circumstances an entity making payments in the normal course of business to a United States individual or an entity will be required to withhold 24% of the payment and remit it to the IRS. This is called “backup withholding”.  The main trigger for backup withholding is when the person or entity receiving the payment does not provide their TIN number to the paying entity.   Form W-9 is typically used to provide the TIN number to the paying entity.  The paying entity is required to include the TIN number to the IRS on any payments reporting on a Form 1099 at the end of the year. Payments that may be subject to backup withholding include interest, tax-exempt interest, dividends, broker and barter exchange transactions.  Rents, royalties, nonemployee pay, payments made in settlement of payment card and third-party network transactions, and certain payments from fishing boat operators may also be subject. Real estate transactions are not subject to backup withholding. Payments will not be subject to backup withholding if the US individual or entity provides the requester with their correct TIN, make the proper certifications, and report all their taxable interest and dividends on their tax return.

Backup withholding

Payments you receive will be subject to backup withholding if: 1. A TIN is not provided to the requester, 2. The TIN is not certified when required (see the Part II instructions on page 3 for details), 3. The IRS tells the requester that an incorrect TIN was furnished. 4. The IRS tells the entity or individual receiving the payment that they are subject to backup withholding because they did not report all their interest and dividends on their tax return (for reportable interest and dividends only), or 5. The entity or individual does not certify to the requester that they are not subject to backup withholding under 4 above (for reportable interest and dividend accounts opened after 1983 only).

Exempt payees

Certain payees and payments are exempt from backup withholding. See Exempt payee code on page 3 of Form W-9 and the separate  Instructions for the Requester of Form W-9 for more information.

Penalties – failure to file correct information return by the due date

If you fail to file a correct information return (like a 1099-MISC) by the due date and you cannot show reasonable cause, you may be subject to a penalty. The penalty applies if you fail to file timely, you fail to include all information required to be shown on a return, or you include incorrect information on a return. The penalty also applies if you file on paper when you were required to file electronically, you report an incorrect TIN or fail to report a TIN, or you fail to file paper forms that are machine readable. The amount of the penalty is based on when you file the correct information return. The penalty is as follows. $50 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $556,500 per year ($194,500 for small businesses, defined below). $110 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,669,500 per year ($556,500 for small businesses). $270 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,339,000 per year ($1,113,000 for small businesses).

Small businesses—lower maximum penalties

You are a small business if your average annual gross receipts for the 3 most recent tax years (or for the period you were in existence, if shorter) ending before the calendar year in which the information returns were due are $5 million or less.

Exceptions to the penalty

The following are exceptions to the failure to file penalty. 1. The penalty will not apply to any failure that you can show was due to reasonable cause and not to willful neglect. In general, you must be able to show that your failure was due to an event beyond your control or due to significant mitigating factors. You must also be able to show that you acted in a responsible manner and took steps to avoid the failure. 2. An inconsequential error or omission is not considered a failure to include correct information. An inconsequential error or omission does not prevent or hinder the IRS from processing the return, from correlating the information required to be shown on the return with the information shown on the payee's tax return, or from otherwise putting the return to its intended use. Errors and omissions that are never inconsequential are those related to (a) a TIN, (b) a payee's surname, and (c) any money amount except with respect to the safe harbor for de minimis dollar amount errors. 3. De minimis rule for corrections. Even though you cannot show reasonable cause, the penalty for failure to file correct information returns will not apply to a certain number of returns if you: a. Filed those information returns timely, b. Either failed to include all the information required on a return or included incorrect information, and c. Filed corrections by August 1. If you meet all the conditions in (a), (b), and (c) above, the penalty for filing incorrect returns will not apply to the greater of 10 information returns or 1/2 of 1% (0.005) of the total number of information returns you are required to file for the calendar year. Intentional disregard of filing requirements. If any failure to file a correct information return is due to intentional disregard of the filing or correct information requirements, the penalty is at least $550 per information return with no maximum penalty. Additional Information - IRS Section 6721  

IRS proposes changes to electronic reporting requirements

The IRS has proposed regulations amending the rules for determining whether information returns must be filed electronically.  The proposed regulations would require that all information returns, regardless of type, be taken into account to determine whether a person meets the 250-return threshold and, therefore, must file the information returns electronically. The proposed regulations also would require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed. In the past, the 250-or-more electronic requirement applied separately to each type of form.  For example, if you had to file 500 Forms 1098 and 100 Forms 1099-A, you were required to file Forms 1098 electronically, but you were not required to file Forms 1099-A electronically. To view the proposed rule click here. Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. This article is also not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.