Form 1099 Filing Requirements – What You Need to Know

/in /by

Forms 1099 are “information returns” that businesses are required to file annually with the IRS. The forms are used to report amounts a business paid out that should be reported by the recipients as income.

Form 1099-MISC, Miscellaneous Income, is probably the most familiar to business owners. But Form 1099-MISC is just one of a group of more than fifteen different forms used to report other types of income to the IRS.

To increase compliance of Form 1099 filing, business income tax forms include questions about whether the business made payments that require issuing the form and whether the business actually did issue it. This scrutiny, coupled with steep penalties, make it important for every business to check Form 1099 filing requirements each year.

Here’s what you need to know about Form 1099.

COMMON 1099s – A variety pack

Under current tax law, every person engaged in a trade or business, including nonprofit organizations, must file Forms 1099 for certain payments made during the year in the course of the payer’s trade or business. Here are some of the most common forms and filing requirements.

  • Form 1099-INT
    Used to report interest payments of $10 or more by financial entities; $600 or more by certain trades or businesses.
  • Form 1099-DIV
    Used to report dividend payments of $10 or more; $600 or more for liquidations.
  • Form 1099-B
    Used to report any proceeds from broker and barter transactions.
  • Form 1099-R
    Used to report distributions of $10 or more from retirement or profit-sharing plans, IRAs, SEPs, annuities, or insurance contracts.
  • Form 1099-S
    Used to report the sale or exchange of present or future ownership interests in real estate.
  • Form 1099-C
    Used to report cancellation of debt of $600 or more.
  • Form 1099-MISC
    Used to report miscellaneous payments generally of $600 or more; $10 or more for royalties; any amount for fishing crews.

1099-MISC – The major business form

Form 1099-MISC is used to report payments for services provided to your business by unincorporated vendors when those payments total $600 or more for the year. Typical payments include rents, royalties, and compensation to independent contractors, such as consultants, web designers, accountants, lawyers, and cleaning services.

Here are five conditions for payments that must be reported using Form 1099-MISC.

  1. The payment was made to a nonemployee.
  2. The payment was made for services (not goods) provided to the trade or business.
  3. The payment was made to an unincorporated entity (except for payments to attorneys and medical and health care payments).
  4. The payment or payments generally totaled $600 or more for the year.
  5. The payment was not made electronically (e.g., with a credit or debit card or with PayPal).

DEADLINES – When to file

January 31 – Give one copy of Form 1099 to the recipient of the payment by this date of the year following payment.

February 28 – Send one copy of Form 1099 to the IRS by this date of the year following payment unless the form is filed electronically.

March 31 – If Form 1099 is filed electronically, this is the deadline for providing a copy to the IRS.

NOTE: Electronic filing is required for businesses filing 250 or more information returns and optional, though encouraged, for businesses filing fewer than 250 information returns.

PENALTIES – A matter of intent

The penalties for failing to file Forms 1099 range from $50 to $250 per form, depending on how late your filing is and whether or not the failure to file was intentional. Total penalties can go as high as $1 million for businesses with gross receipts under $5 million or $3 million for those with gross receipts over $5 million.

To increase compliance of Form 1099 filing, federal income tax returns for businesses include the following questions:

  1. Did your business make any payments during the year that would require it to file Form(s) 1099?
  2. If “yes,” did or will the business file required Forms 1099?

MORE HELPFUL FACTS

  1. If you receive a Form 1099 with an incorrect dollar amount, request a corrected copy from the payer before tax filing time.
  2. Only trades and businesses are required to report payments made in the course of business on Form 1099. No reporting is required for personal payments. For example, a business owner who pays a dentist $1,500 for a child’s dental work does not need to report that payment on Form 1099.
  3. Payments of $600 or more to attorneys in the course of business must be reported on Form 1099-MISC, whether the attorney is incorporated or not. Medical and health care payments made to corporations must also be reported.
  4. Payments to vendors by credit or debit card, or by services like PayPal, should not be reported on Form 1099-MISC. The bank or third-party payment provider is required to report those transactions on Form 1099-K.
  5. Nonprofit organizations are subject to Form 1099 filing requirements because they are considered to be “engaged in a trade or business.”
  6. The fact that payments may not have to be reported on Form 1099 does not mean that the payments are exempt from income tax. All income must be reported on the income tax return of the recipient.
  7. To properly complete Forms 1099 and avoid penalties, a business needs the recipient’s name, taxpayer identification number, and a mailing address. Obtain this information by sending the recipient Form W-9, Request for Taxpayer Identification Number and Certification. If the recipient fails to provide the necessary information, the business may have to withhold taxes from payments and remit these amounts to the IRS.

AN ACTION LIST – Staying compliant

  1. Review accounts payable and cash disbursements to capture reportable payments.
  2. Verify that the information on Form W-9 is current for each vendor.
  3. Initiate a policy that no vendor will be paid unless Form W-9 is completed.

For additional information about the Form 1099 filing requirements that apply to your business, please contact our office.

Need money to pay bills? Raiding your 401(k) is not a good idea

/in /by

When you’re short of cash, raiding your 401(k) plan may seem like a good idea. Here are two reasons why it isn’t.

Penalties and taxes. If you’re not at least 59½ years old, you’ll be hit with a 10% penalty for early withdrawals except in certain limited cases, and the money you withdraw will be taxed at your regular tax rate.

Lost opportunity. If your 401(k) earns an annual return of 5% over the next 30 years, an account with a balance of $50,000 could grow to over $215,000. A withdrawal taken and spent today will cost you that growth.

Bottom line: If possible, find other ways to pay your bills, even if that means contributing less to your 401(k) in the short term. While it’s wise to match funds your company provides, you might consider temporarily reducing contributions that exceed the matching amount.

What about loans? A 401(k) loan also has drawbacks. Again, money that’s not in your account won’t grow. In addition, if you lose your job, you’ll have to repay the outstanding loan balance or face tax penalties.

If you need assistance with financial issues, give us a call.

Are you 65 or older? Include these tax breaks in year-end planning

/in /by

Celebrate your 65th birthday with federal income tax benefits. Here are some of the breaks available once you reach age 65.

Higher standard deduction. Your standard deduction is the sum of the basic standard deduction plus an additional standard deduction if you are age 65 or older at the end of the tax year. You are considered to be 65 on the day before your 65th birthday. For your 2015 tax return, you can add an extra $1,550 to your standard deduction if you’re single. If you and your spouse are both 65 or older, your combined extra deduction is $2,500.

Tax credit for the elderly. You may qualify for this direct reduction of your federal income tax if you’re age 65 or older. There are limitations if tax-free pension benefits such as social security exceed certain levels. Income limitations may also apply.

Medical expense deduction. Generally, when you itemize, unreimbursed medical expenses can be deducted only when they exceed 10% of your adjusted gross income. However, for 2015, when you’re 65 or over, you can deduct medical expenses that exceed 7.5% of your income. Are you married? Only one spouse needs to be 65 or older to qualify.

Please contact our office to make sure you’re receiving all the tax breaks for which you qualify at any age.

Congress renews tax breaks in year-end legislation

/in /by

The Protecting Americans from Tax Hikes Act of 2015 was signed into law on December 18, 2015. The law renews a long list of tax breaks known as “extenders” that have been expiring on an annual basis.  This legislation makes some of the rules effective through December 31, 2016. Others are effective through 2019, and some are effective permanently. Provisions in the Act also make changes to existing tax rules that were not part of the extenders. All of these changes will affect your tax planning now and in future years.

Here’s an overview of selected provisions.

  • The provision for tax-free distributions from IRAs to charities is now permanent. When you’re age 70½ and over, this break lets you make a qualified distribution of up to $100,000 from your IRA to a charity. The transfer counts as a required minimum distribution and is excluded from your gross income.
  • If you’re a homeowner, you can exclude mortgage debt cancellation or forgiveness of up to $2 million for 2015 and 2016. Discharges of qualified mortgage debt can also be excluded after January 1, 2017, if you have a binding written agreement in effect before that date. This tax break is only available for your principal residence.
  • If you or a family member is an eligible student, you may be able to claim a tuition and fees above-the-line deduction for qualified higher education expenses for 2015 and 2016. For 2015 tax returns, the maximum deduction is $4,000 when your adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers). The maximum deduction is $2,000 when your AGI is less than $80,000 ($160,000 for joint filers).
  • The deduction for up to $250 of out-of-pocket eligible educator expenses is now permanent. It will be indexed for inflation beginning with 2016 tax returns. You claim this deduction “above the line,” meaning it’s available even if you don’t itemize. If you do itemize, you can also generally claim qualified expenses above $250 as a deduction subject to a 2% of adjusted gross income limit.
  • The optional itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes is now permanent. This deduction is especially beneficial if you live in a state with no income tax. You may also benefit no matter where you live if you pay sales tax on a large ticket item such as an automobile, boat, or RV.
  • When you itemize, you can treat mortgage insurance premiums as deductible home mortgage interest in 2015 and 2016. The deduction is subject to phase-out based on adjusted gross income.
  • You may be able to claim a credit of 10% of the cost of energy-saving improvements installed in your home in 2015 and 2016, subject to a lifetime credit limit of $500.
  • The maximum Section 179 deduction for qualified business property, including off-the-shelf software, is now permanently set at $500,000 (subject to a taxable income limitation). That means you can immediately write off up to $500,000 of the cost of assets you purchased and placed in service during the year. The deduction is phased out above a $2 million threshold. Both thresholds will be indexed for inflation beginning in 2016.
  • You can treat qualified leasehold improvements, qualified retail improvements, and qualified restaurant property as Section 179 property subject to a first-year write-off limit of $250,000 for 2015. Modifications to the definition of certain real property that can be treated as Section 179 property, as well as limitations and the maximum amount available to such property, take effect after 2015. In addition, the thresholds will be indexed for inflation beginning in 2016.
  • The additional first-year depreciation deduction, known as “bonus depreciation,” is generally extended through 2019 when you buy qualified business property. The deduction is subject to a phase-out beginning in 2018 of 10% per calendar year, but you can deduct up to 50% of the cost of qualified property for 2015 through 2017. You can claim this deduction in conjunction with Section 179.
  • The business research and development (R & D) tax credit is made permanent. The law permits eligible small businesses to claim the credit against AMT liability beginning in 2016.
  • The work opportunity tax credit is extended for five years (through 2019) when you hire eligible individuals. The credit is also expanded to include qualified long-term unemployment recipients who begin work after December 31, 2015.

The remaining extenders range from such things as enhanced deductions for donating land for conservation purposes to tax credits for energy-efficient new homes.

The Protecting Americans from Tax Hikes Act of 2015 also makes changes to 529 college savings plans, such as including the purchase of computers and related services in the definition of qualified higher education expenses. The law modifies tax-free ABLE accounts for disabled individuals to allow flexibility in choosing a state program, as well as rollovers of amounts from 529 college savings plans to these accounts. The law also delays for two years the “Cadillac tax” on high cost health care plans.

Because the Act was passed so late in the year, it will be important for you to review your 2015 transactions to take advantage of applicable breaks in order to claim them on your 2015 federal income tax return. Also, with the rules now extended through 2016 (and in some cases beyond), you can begin to update your current tax plan with some measure of certainty.

Contact us for more information and for help determining which changes affect you.

Wedding Ring

Discuss Money Before You Marry

/in /by

Couples often enter into marriage without ever having had a serious discussion about financial issues. As a result, they find themselves frequently arguing about money. If you are planning a wedding, here are some steps you can take to get your marriage off to a good financial start. Read more

Taxes File Folder

A Quick Recordkeeping Guide

/in /by

Is your file cabinet overflowing? Do you hesitate to purge tax information because you’re not sure what to keep and what to discard? Here’s a quick guide to help you cut through the clutter. Read more

Watch Year-End Mutual Fund Transactions

/in /by

The income tax effects of mutual funds can be complex, and poorly timed purchases or sales can create unpleasant year-end surprises. Read more

Postpone Taxes With This Strategy

/in /by

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain. Read more

Job Search Expenses May be Deductible

/in /by

WASHINGTON – IRS Summertime Tax Tip 2015-24:  People often change their job in the summer. If you look for a job in the same line of work, you may be able to deduct some of your job search costs. Read more

Are Itemized Deductions Worth the Effort?

/in /by

Knowing the difference between the standard and itemized deduction might save you a lot of time and trouble, and some taxes to boot. Read more