IRS FORM 1099

REPORTING: REPORTING

REQUIREMENTSIRS Course ID: GEHNZ-T-00022-19-O

Today’s Plan

• Basic overview of Form 1099-MISC

• What payments are reportable

• Form 1099-NEC is making a comeback in 2020

• Due dates and how to send to the IRS

• Penalties

• Employee vs. contractor

• Form W-9

• B Notices

• Backup withholding

• Interaction Between Form 1099-K and the 1099-MISC

• What About Rental Property?

What is Form 1099-

MISC?

What is Form 1099-MISC

• Reports certain payments made by businesses

Who must file:

• From Section 6041: “all persons engaged in a trade or

business.” The word “person” means all business entities.

• This includes non-profit/tax-exempt entities!

• What about rental owners? More on that later.

What Payments are

Reportable

What Payments are

Reportable

$600 is the key number for most of the boxes on the 1099-MISC.

The form is sent to:

• Individuals/sole proprietors

• Partnerships

• 1-person LLCs if the LLC is taxed as a sole proprietor or partnerships

The form is generally NOT sent to:

• Corporations — unless you paid the corporation for medical or legal

services. More later.

Form 1099-MISC: Common

BoxesBox 1: Rent

Box 2: Royalties — the reporting threshold for this box is $10 or

more

Box 3: “Other Income” — prizes, etc.

Box 4: Federal Tax Withholding (Backup Withholding)

Box 6: Medical and Health Care Payments

Box 7: Nonemployee Compensation

Box 14: Gross Payments to Attorneys

1099s to Corporations

Medical and healthcare payments.

• The IRS defines medical or healthcare services as: “the

prevention, diagnosis, treatment and management of

disease, illness, or injury by a professional.”

Warning: the IRS considers veterinary services to be

“healthcare” services, so farmers or ranchers may have

a 1099 requirement for payments to their vet!

1099s to Corporations

Legal services:

●If a business pays legal fees to a law firm, a 1099 needs

sent even if the law firm is a corporation

●Attorney fees for legal work = box 7

●Money paid to attorneys as part of legal settlements =

box 14

●WARNING: a 1099-MISC might need sent to the

other party of the settlement too, with the amount

reported in box 3!

Polling Question #1

The key dollar amount for most boxes on the Form 1099-

MISC is:

A. $600

B. $1,000

C. $5,000

D. $10,000

Form 1099-MISC:

What’s New

Form 1099-NEC is Being

Resurrected

• For 2020 tax year, the IRS is bringing back Form 1099-

NEC

• This form was last seen in 1982

• Available in draft format here: https://www.irs.gov/pub/irs-

dft/f1099nec--dft.pdf

• It will be used to report payments made to independent

contractors (so Box 7 on the current 1099-MISC)

Form 1099-MISC 2020 Draft

• Here is the draft of the 2020 Form 1099-MISC:

https://www.irs.gov/pub/irs-dft/f1099msc--dft.pdf

• Box 7 is still there, but is now a checkbox for direct sales

of over $5,000.

Forms 1099-NEC and 1099-

MISC

• REMINDER: THIS CHANGE IS COMING FOR 2020 —

SO FOR FILINGS IN JANUARY OF 2021.

• THERE IS NO CHANGE FOR 2019 FILINGS DUE IN

JANUARY OF 2020.

Due Dates and How to

Send to the IRS

Due Dates

The due dates changed starting with 2016 filings due in early 2017.

Old Due Dates

• Due date to get the form to the recipient: January 31

• Due date to send copies to the IRS: February 28/29 if filing on paper, or March 31 if e-

filing

New Due Dates

• Due date to get the form to the recipient: January 31 (so no change)

• Due date to send copies to the IRS if reporting Box 7 pay: January 31

• Due date to send copies to the IRS for all other boxes: February 28/29 or March 31

Form 1096

• Form 1096 is a summary form used if you file 1099s on paper

• If you e-file, there is no Form 1096 to worry about

• The instructions to the 1096 say, if you are filing 1099s that

report multiple boxes, you should send the Box 7 1099s in one

mailing with one Form 1096, and send the other 1099s in a

separate mailing with a different Form 1096.

• Warning: if you combine everything into one mailing, and

send the mailing after January 31, and the mailing

includes Box 7 1099s, the IRS says it will treat ALL of the

forms and boxes as being late, not just the Box 7 1099s.

Penalties

Penalties for Late Filing

Penalties for late filing a 1099-MISC in 2019 (for “small taxpayers” [revenue $5

million or less]):

• If less than 31 days late: $50 per form (maximum penalty $187,500 — this is

equivalent to 3,750 late forms)

• If filed 31 days late up thru August 1st: $110 per form (max penalty of

$536,000 — this is equivalent to 5,360 late forms)

• If filed after August 1st or not filed at all: $270 per form (max of $1,072,500

— this is equivalent to 4,125 late forms)

• If the IRS says the taxpayer “intentionally disregarded” the rules as a part of

their failure to file, the penalty is $550 per return with no maximum limit.

These amounts are adjusted annually for inflation and are for filings for 2019

due in January 2020.

How to Get Out of Penalties

• “Inconsequential” Errors

• Wrong address

• Misspelled first name

• “Safe Harbor for De Minimis Dollar Amount Errors on Information

Returns and Payee Statements under sections 6721 and 6722”

• For payment amounts (i.e. Box 7 payments to a contractor, for

example): if the dollar amount difference is less than $100, no

correction needs done and there is no penalty.

• This dollar amount is $25 for reporting backup withholding on the

1099-MISC

How to Get Out of Penalties

If a corrected 1099 is issued no later than August 1st, and

the number of forms being corrected is 10 or less there is no

penalty.

Employee vs.

Contractor

Why is it Important?

• From the IRS’s standpoint: payroll taxes!

• Employees are a big commitment; payroll taxes; insurance

issues; you have to manage the employee!

• Contractors are a smaller commitment; just pay the

contractor and you’re done; no payroll taxes

Employee vs. Contractor

You can’t just say “this person is a contractor.”

The IRS gives various tests, which can be found here

https://www.irs.gov/newsroom/understanding-employee-vs-

contractor-designation

1. Behavioral control

2. Financial control

3. Nature of relationship

Also see Form SS-8: https://www.irs.gov/pub/irs-pdf/fss8.pdf

Behavioral Control

• Does the paying business tell the person when to show

up, how to do the job, provide the training, and supervise

the work? This would indicate that the person is an

employee.

• Does the worker follow their own processes and

procedures for doing the work? If so, they’re probably a

contractor.

Remember: contractors are separate business entities!

A person receiving a 1099-MISC files a Schedule C as a

sole proprietor!

Financial Control

I like to think of this as, who has the financial risk in the relationship.

Example:

• A contractor will almost always use their own equipment to do a job. If the

equipment breaks, the contractor is responsible for fixing or replacing the

equipment.

• An employee will typically use the employer’s equipment, and the employer is

responsible for fixing or replacing the equipment.

• A contractor is typically responsible for his or her own expenses and taking their

own tax deduction on their tax return.

• Contractors can suffer a loss on a job and typically are not guaranteed any

minimum amount of pay. Employees are usually guaranteed a wage that is paid

even if they don’t do a very good job.

Relationship

How do the business and the worker perceive their relationship?

A written contract saying “this person is a contractor” can be evidence but

this alone is not sufficient to determine if a person is really a contractor.

Benefits: Does the business provide benefits such as vacation pay or

insurance to the worker? If so, this almost always indicates the worker is

an employee — and beware of these arrangements possibly violating

the law!!! (Example: contractors can’t be in a 401k plan!)

Permanency: If the relationship is intended to be ongoing and consistent, this

could indicate the person is an employee, especially if they are in the office

every day

Key services: is the worker performing work that is a core part of the

business’s offerings to the public? Example: bartender in a bar

Form W-9

Form W-9: What is It?

• Contractors fill it out to help you determine:

• If you need to issue a 1099, and

• Give you the information needed to issue the 1099,

such as name, address, SSN or EIN, etc.

Form W-9

Line-by-Line Through the W-9

Remember, the contractor fills out the W-9!

• Line 1: The name of the contractor

• Individuals: put their personal name here

• Corporations: put the corporate name here

• Partnerships: put the partnership name here

• LLCs:

• A 1-person LLC taxed as a sole proprietorship will put the proprietor’s personal name

here!!!!!

• Multi-member LLC taxed as a partnership, or an LLC taxed as a corporation: put the LLC

name here

Form W-9

Line-by-Line Through the W-9

• Line 2: Business name/disregarded entity name

• Often will be left blank

• If the contractor has a dba name they use which is different from Line 1, they would put

that here.

• Examples: some corporations have a “real” corporate name they use on legal

documents (Line 1), but hold themselves out to the public under a dba.

• A 1-person LLC would put the LLC name here

• Example: Joe Smith owns Joe Smith, LLC, a 1-person disregarded entity. Joe

would put “Joe Smith” on Line 1, and “Joe Smith, LLC” on Line 2.

Form W-9

Line-by-Line Through the W-9

• Line 3: Federal Tax Classification — this gets tricky,

especially with LLCs

• Sole proprietors and 1-person LLCs taxed as a sole

proprietorship check the “individual” box

• An LLC taxed as a partnership, S-corp or C-corp would

first check the LLC box and then mark a P, S or C to

indicate its tax classification

Form W-9

Line-by-Line Through the W-9

• Line 3: What about tax-exempt nonprofits?

● Check the “Other” box and write in “tax-exempt non-profit under

Section 501(x)” — 501(c)(3), etc

● Line 4: “Exemption Code,” which refers to backup withholding or FATCA

withholding. FATCA applies to things such as foreign bank accounts and

is not applicable to our discussion today.

● Individuals are seldom exempt from backup withholding!

● Corporations would put the code for Corporation here; others will

usually leave blank

Form W-9

Line-by-Line Through the W-9

• SSN or EIN

● IMPORTANT: For a 1-person LLC taxed as a sole proprietor, they should put

the OWNER’s SSN here, not the EIN of the LLC. (NOTE: if the proprietor

happens to have an EIN in their name personally, they can use the EIN here.)

● Many if not most 1-person LLCs taxed as sole proprietorships get this

wrong!!!!!

● Source: IRS instructions to the W-9, page 4

● “If you are a single-member LLC that is disregarded as an entity separate

from its owner, enter the owner’s SSN (or EIN, if the owner has one). Do

not enter the disregarded entity’s EIN. If the LLC is classified as a

corporation or partnership, enter the entity’s EIN.”

Form W-9

As the recipient, how much responsibility do you have for

making sure the W-9 is correct?

• The W-9 is ultimately the contractors responsibility

• They can be hit with IRS penalties for providing

incorrect information

• The W-9 is to protect you — if the contractor gives you

faulty information, you can use the W-9 to show you

relied on info given to you by the contractor

Polling Question #2

Who is responsible for filling out an accurate Form W-9?

A. The accountant

B. The paying business

C. The contractor

B Notices from the IRS

B Notices

• A “B Notice” refers to letters businesses receive when there is a mis-match between what they put on the 1099 versus what is in the IRS system. Example: wrong SSN.

• First B Notice: the contractor has 30 days to get you accurate information, or else you have to start backup withholding on future payments to that contractor.

• Second B Notice: refers to receiving another B Notice on the same person within a 3-year period. This time the contractor also has 30 days to get accurate information to you, but they also must provide proof of their SSN or EIN to you. Backup withholding would apply to future payments to them if they don’t respond.

Backup Withholding

• Current rate is 24%

• Account for on Form 945. This form is due yearly.

• Deposit requirements depend on how much withholding you’re

doing

● Less than $2,500: deposit yearly with the Form 945

● More than $2,500: see Publication 15 and follow the same

deposit schedule as for other types of payroll liabilities. But

make a separate deposit for your backup withholding; do

not lump together with regular Form 941 withholdings.

Form 1099-K and Form

1099-MISC: The

Interaction

Form 1099-K

What is Form 1099-K?

● Reports payments from third-party processors (i.e. PayPal) or from credit/debit card transactions.

● All credit/debit card transactions are reported● Third-party processor transactions are reported if:

○ More than 200 transactions, AND○ More than $20,000 processed

Form 1099-K is a form your client will RECEIVE, not a form they will issue!

Interaction with 1099-MISC

● Contractors paid with a credit or debit card, or via

PayPal, do not need to be issued a 1099-MISC.

● Yes, really!

● When a contractor is paid with a credit or debit card,

or via PayPal, the potential exists for income to be

double-reported to the IRS: once on 1099-K and again

on 1099-MISC.

● Treasury Department’s solution to this: no 1099-MISC

is issued if the payment falls under the 1099-K rules.

See Treasury Regulation 1.6041-1(a)(1)(iv)

Interaction with 1099-MISC

What about the 200 transaction/$20,000 thresholds?

The paying business is NOT responsible for knowing if the

contractor’s total transactions for the year rise above these

thresholds.

● In other words: if a business uses PayPal to pay a contractor,

the business does not need to issue a 1099-MISC to the

contractor, AND the business is not responsible for knowing if

PayPal will issue a 1099-K to the contractor

Doesn’t this create a potential hole in income reporting????

YES!

Interaction with 1099-MISC

If a business pays a contractor using multiple methods, payments made by credit or debit card, or via PayPal, do NOT need shown on the 1099-MISC.

• ABC pays Joe $800 by check and $1,000 by credit card, for a total of $1,800. ABC should issue a 1099-MISC for $800 for the portion paid by check. ABC does NOT include the $1,000 paid by credit card because that falls under the 1099-K rules.

• ABC pays Joe $400 by check and $1,000 by credit card, for a total of $1,400. ABC does NOT need to issue a 1099-MISC at all in this circumstance because the portion paid by check is less than $600, and the remainder falls under the 1099-K rules.

1099-K: Common Questions

• What about ACH or EFT transactions: these are not

“payment card” transactions, so still fall under the 1099-

MISC rules.

• What about payment apps such as Venmo?

• It depends. Is the app a third-party processor (as in

PayPal) or is it simply connecting one person’s bank

account to another person’s bank account?

Polling Question #3

When does a business NOT need to issue a 1099-MISC in

the following scenarios:

A. Payment made with a credit card

B. Payment made in cash

C. Payment made with a check

D. All of the above

Rental Property

Rental Property Refresher

Rental Property Refresher (yes, this ties into the 1099 discussion):

1.Rental property is either a “trade or business” under Section 162, or “investment” property under Section 212

2.Either way, it is shown on Schedule E, and is not subject to SE tax (EXCEPTIONS: reporting and SE tax are different with short-term rentals where “significant personal services” are provided)

3.The same deductions (with one exception, for home offices) are available either way

4.Rental activity, by default, is a passive activity under Section 469 —losses can be deducted up to $25,000, subject to AGI phaseouts

5.If a taxpayer meets the tests to be a “real estate professional,” the loss limitations and AGI phaseouts do not apply

1.Real estate professional = someone who works in certain fields related to real estate, and who owns rental properties, and who meets certain hours of participation thresholds

2.Yes, this is an over-simplification of the definition of a real estate pro!

Do Landlords Issue 1099s?

• Is rental property a “trade or business”?

• This question has perplexed tax pros, taxpayers, the IRS

and courts for nearly 80 years.

• Historically, courts have often said rental property is a

trade or business as long as the taxpayer is involved in the

activity on a regular and continuous basis. There is no

hours test; “it is if it is.”

Rentals, 1099s and the QBI

Deduction

What about the new “QBI Safe Harbor” for rental activity?

• If a taxpayer can show 250 or more hours of participation

in their rental activity, they have safe harbor protection for

taking a QBI deduction relating to that rental.

• But any rental can take the QBI deduction if the rental is a

trade or business. The “QBI Safe Harbor” is just that: a

safe harbor that provides audit protection for the

assumption that an activity is a trade or business.