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Form 1099 Filing Requirements Cover a Lot of Ground

Form 1099 Filing Requirements Cover a Lot of Ground

There are a number of different Form 1099's that are used to report various types of payments made by businesses. However, for the vast majority of small businesses, the Form 1099 reporting requirement will boil down to Form 1099-MISC (Miscellaneous Income) reporting.

Federal Reporting Requirements for Form 1099-MISC

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.

Payments are reportable (i.e., they must be reported on Form 1099-MISC) when all of the following conditions apply:

  1. The payment was made to a nonemployee.
  2. The payment was made for services rendered to or on behalf of the payer's trade or business.
  3. The payment was made to an individual, partnership, estate, or in some cases, a corporation. Note: Payments to corporations (including S corporations) generally don't need to be reported. Payments to attorneys are the most notable exception to this rule.
  4. Payment(s) to the payee totaled $600 or more during the year (including payment for parts or materials used by the payee in rendering the services if supplying the parts or materials was incidental to providing the service).
  5. The payment was not made electronically, such as through a credit card, debit card, PayPal, or gift card. For electronic payments, the bank or third-party payer must report the payment to the IRS and recipient on Form 1099-K.  Therefore, to avoid duplicate reporting, the business doesn't have to report the transaction on Form 1099-MISC.

Nonemployee Compensation. Nonemployee compensation includes commissions, prizes, awards, and other forms of compensation for services rendered to the payer's trade or business. Examples include the following:

  • Fees paid for professional services such as fees paid to attorneys (including corporations), accountants, architects, contractors, and engineers.
  • Fees paid by one professional to another, such as fee-splitting or referral fees.
  • Payments by attorneys to witnesses or experts in legal adjudication.
  • Payments for services, including payment for parts or materials used to render the services if supplying the parts or materials is incidental to providing the service. For example, the total insurance company payments to an auto repair shop for a repair contract showing separate amounts for labor and parts are reported if furnishing parts was incidental to repairing the auto.
  • Commissions to nonemployee salespersons that are subject to repayment but not repaid during the calendar year.
  • A fee paid to a nonemployee, including an independent contractor, or travel reimbursement that the nonemployee did not account to the payer, if the fee and reimbursement total at least $600.
  • Payments to nonemployee entertainers for services rendered.
  • Exchanges of services between individuals in the course of their trades or businesses. For example, if an attorney represents a painter for nonpayment of business debts in exchange for the painting of the attorney's law offices, the amount reported by each on Form 1099-MISC is the FMV of his or her own services performed. However, if the attorney represents the painter in a divorce proceeding, the divorce is an activity that is unrelated to the painter's trade or business. Therefore, the attorney reports the FMV of his or her services on Form 1099-MISC, but the painter does not report the value of painting the law offices on Form 1099-MISC because the work is in exchange for legal services that are separate from the painter's business.
  • Taxable fringe benefits provided to nonemployees.
  • Payments of director's fees and other remuneration to members of the board of directors, including payments made after retirement.

Trade or Business Requirement. The 1099-MISC reporting requirements apply only if the payer is engaged in a trade or business. A payer is engaged in a trade or business regardless of whether it operates for gain or profit. Thus, nonprofit organizations are considered to be engaged in a trade or business and are subject to the Form 1099-MISC reporting requirements.

Only payments made in the course of the payer's trade or business are reportable. Personal payments are not reportable. Therefore, a payment by a sole proprietor to a doctor for medical services provided to the proprietor's child need not be reported.

Penalties for Not Filing Form 1099
The penalties for failing to file Form 1099 can be significant. One penalty applies for failing to timely file a complete and accurate form with the IRS. An additional penalty applies for failing to provide the statements to the recipients of the payments. The calculation of both penalties depends on when the failure is corrected (i.e., when the correct information return is provided to the IRS and the recipient).

The penalty does not apply if the failure is due to reasonable cause and not willful neglect. Promptly correcting an erroneous return is one factor the IRS considers when deciding whether to waive the penalty because the filer has shown reasonable cause.

When a filer fails to timely file a complete and accurate information return because of an intentional disregard of the rules, the penalty is the greater of $530, or 10% of the aggregate dollar amount of the items required to be reported correctly on the return.

Observation: A business that fails to file a Form 1099-MISC with the IRS, probably will also fail to supply the recipient with a copy of the form (a payee statement). The business in this case will be subject to both penalties. So, as a practical matter, these penalties will often end up being double the amount listed below.

Penalty Rates

Time returns filed/furnished

 

Large Businesses with Gross Receipts of More Than $5 Million

Small Businesses with Gross Receipts $5 Million or Less

 

Not more than 30 days late
(by March 30 if the due date is February 28)

 

$50 per return/
$536,000 maximum

$50 per return/
$187,500 maximum

 

31 days late – August 1

 

$100 per return/
$1,609,000 maximum

$100 per return/
$536,000 maximum

 

After August 1 or Not At All

 

$260 per return/
$3,218,500 maximum

$260 per return/
$1,072,500 maximum

 

Intentional Disregard

 

$530 per return/
No limitation

$530 per return/
No limitation

 

 To Avoid Penalties

Beginning with the 2016 tax year:

Employers must furnish copies of information returns to the employee by January 31 of the following year. Businesses, including tax exempt and government entities, must send Copy A of Form 1099-MISC to the IRS by:

  • January 31 of the following year when you’re reporting non-employee compensation payments in Box 7;
  • February 28 if filing by paper when you’re NOT reporting non-employee compensation in Box 7; or
  • March 31 if filing electronically when you’re NOT reporting non-employee compensation in Box 7. 

Pennsylvania Reporting Requirements and Withholding on PA source Non-Employee Compensation, Business Income and Lease Payments

The Form 1099-MISC which reports amounts as non-employee compensation is also required to be filed in paper with PA Department of Revenue by January 31.

New withholding requirements are effective as of January 1, 2018.  PA tax withholding is required for anyone that pays PA source non-employee compensation or business income to a non-resident individual or disregarded entity that has a non-resident member and is required to file a Federal Form 1099-MISC with the PA Department of Revenue.  Withholding from such payments is at a specified tax rate which is currently 3.07%.  However, withholding is optional for payors paying payees less than $5,000 annually on a calendar year basis.  

In addition, anyone leasing Pennsylvania real estate who makes lease payments in the course of their trade or business to a non-resident lessor is also required to withhold from such payments at a specified tax rate which is currently 3.07%.  However, withholding is optional for lessees paying a non-resident lessor less than $5,000 annually on a calendar year basis.  Lease payments include, but are not limited to, rents, royalties, bonus payments, damage rents and other payments made pursuant to a lease.

Payors that withhold from a payee will be:

  1. Required to apply for a 1099-MISC withholding account by completing a PA-100 Pennsylvania Enterprise Registration Form electronically at: pa100.state.pa.us.
  2. Required to electronically file quarterly withholding returns and annual reconciliations with the Department via e-Tides.
  3. Required to electronically remit the withheld monies via e-Tides.
  4. Liable for withheld taxes in the same manner as employers withholding employee compensation.
  5. Liable for taxes not withheld in the same manner as employers withholding employee compensation.

 For additional information, contact the author Craig A. Mengel at camengel@herbein.com, or read more about Craig here.