Basics of 1099 Reporting F. Milene Henley, San Juan County Auditor WSACA Finance Conference April 8, 2015

Topics

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The Tax Gap W-9s Backup Withholding 1099s Reportable transactions Tracking payments 1096s Electronic transmittal Payments to non-resident aliens Corrections Problems Penalties, & how to avoid them

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The Tax Gap • • •

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The IRS has been measuring the tax gap for decades. It has focused on reducing it since about 2006. In its most recently released statistics (2006 data, released in 2011), the gap had not measurably decreased (since 2001) “Compliance is highest where there is third-party information reporting and/or withholding.” Hence the emphasis on 1099s.

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W-9s • Don’t wait until you need them to request them! – Make it a part of your new vendor setup – Be able to mail fillable forms • Signature is not required

– If they refuse to comply, inform them that you will: • Comply with backup withholding requirements • File a 1099 with “REFUSED” in the TIN field • Not do business with them in the future

– Get a W-9 even if payee is exempt (for example, a corporation), to document why no 1099 was issued. 5

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1. Name must match TIN records • Validate with IRS TIN matching services: • www.irs.gov; search for “e-services”

2. Entity type determines exemption: – Corporations are exempt from reporting, except for medical and legal services – LLCs: • Are not corporations! • But, if they report as a corporation, are exempt • Single-member LLCs are disregarded (treated as sole proprietorships) 7

3. Exemptions: a) Entities exempt from backup withholding and 1099 reporting i.

Corporations – Corporations do not have to check this box in order to be exempt (exempt payee code 5) ii. 501(a) tax-exempt organizations (code 1) iii. US Government (code 2) iv. State gov’ts and its subdivisions (code 3)

b) FACTA (Foreign Account Tax Compliance Act) a) For use by FFIs (Foreign Financial Institutions) only; doesn’t apply to us 8

4. TIN (SSN or EIN) a) Must match name in Line 1

5. Is a Signature Required? a) No, for most payments: i.

Professional services (non-employee compensation) ii. Rent iii. Legal or medical services iv. Gross proceeds to attorneys

b) Yes, for:

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i. Real estate transactions ii. Interest, dividend, broker & barter iii. Correcting a bad TIN

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W-9 FAQs • How long are W-9s good? – Until the information on the form changes. – If you haven’t done business with a vendor for a few years, a current W-9 is recommended.

• May we use copies/email attachments? – Yes, generally. For some reporting, original signatures are required

• May we use substitute forms? – Yes, if all required information is included. 10

Backup Withholding • Withhold 28% of payments if: – The vendor fails to provide a W-9 – The IRS notifies you that the vendor is subject to backup withholding – You receive a CP2100 Notice, send a “B” notice to the vendor, and get no response

• Deposit withheld taxes by EFT monthly. Report them on annual Form 945.

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Form 1099-MISC 1

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1099-MISC: What is reportable? Payments which are commonly reportable by local governments on Form 1099-MISC: • Box 1: Rents ($600+) – – – –

For long-term occupancy For meeting places For storage facilities For equipment, from bulldozers to carpet cleaners

• Box 6: Medical and health care payments ($600+) – Medical or health care services – Health care insurance cost – Include even if paid to corporations 13

1099-MISC: What is reportable? • Box 7: Nonemployee compensation ($600+) – Services, but not goods – If goods are invoiced with and incident to the service, both are reportable – Legal services, even if paid to corporations – Reimbursements for expenses or travel, if receipts are not provided OR if costs are marked up – Payments to employees for non-overnight travel, even if actual expenses are paid

• Box 14: Gross proceeds paid to an attorney ($600+)

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– Settlements – Escrow payments – Any other payment that is not for services

1099-MISC: What is reportable? • Box 4: Federal income tax withheld (any amount) – Report backup withholding here

• Less commonly reported by governments: – Box 2: Royalties ($10+) – Box 3: Other income (threshold varies) – e.g. prizes (except those paid to employees), damages, jury or witness fees, deceased employee wages paid to an estate

• Do not include sales tax in amounts reported • “If in doubt, send it out.” Most payments are reported in either Box 7 or Box 3. 15

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Other Forms 1099 • 1099-INT, Interest Income – If you pay interest of $10 or more to a non-exempt entity • 1099-S, Proceeds from Real Estate Transactions – usually the escrow company will file

• Do not file: – 1099-C, Cancellation of Debt – Local governments are not required to file 16

Tracking payments & Submitting forms • Most financial systems can label vendors and/or payments as reportable – Still requires the attention of payables deputies to monitor non-reportable payments (e.g. sales tax)

• A good system will: – Total reportable amounts – Generate 1099s and 1096s – Submit them electronically to the IRS

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• A thorough review prior to reporting is recommended

Form 1096

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Form 1096 1. Summarizes the number and total amount (of both withholding and payments) of 1099s transmitted 2. Can report only one type of 1099 (e.g. 1099-MISC) per 1096

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Electronic transmittal • Electronic transmittal to vendors requires consent • Electronic transmittals to the IRS is required if filing 250 or more information returns • If you file for your junior districts, report them separately, under their own EIN, with their own 1096 • Due dates: – February 28 for paper filers – March 30 for electronic filers

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Payments to NRAs (non-resident aliens) • Vendor must provide Form W-8 (not W-9) • Payments are subject to 30% withholding unless vendor is covered by a treaty (Canada is) • Payments are reported on Form 1042-S, whether there is withholding or not 21

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Correcting 1099s • For a few, file corrected forms on paper (check the “Corrected” box on top) – The IRS provides detailed instructions on how to make corrections (see next page)

• For many, file them electronically – (more than 250 are required to be filed electronically, same as originals)

• Electronic uploads can be corrected electronically 22

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1099 problems • Vendor says the amount is incorrect. – Verify your calculation. If incorrect, correct it and re-issue. Document everything.

• 1099 not received by vendor – You may get a call from a vendor, or your mail may be returned. Either way, document the date of your original mailing. Then update the address, and send it out again. – If you cannot get a valid address from vendor, document your efforts. Do not do business with that vendor again until you have a valid address.

• Vendor calls: “I’m a corporation/government/ fill-in-theblank. You’re not supposed to send me a 1099.” – If that’s true, tell them you won’t send one next year. – There is no need to void an issued 1099 unless the amount is incorrect. 24

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Penalties • Penalties for late filing: – – – –

$30/return for filing within 30 days $60/return for filing by August 1 $100/return for filing after August 1 Maximum penalty: $1,500,000

• Penalty for “intentional disregard”: – $250/return, with no maximum

• Penalty for “failure to file correct statement” may also be assessed. 25

To Avoid Penalties • Maintain a culture of compliance • File correctly and on time • Document your compliance, and diligently maintain your records • Respond promptly & appropriately to vendor, district, & IRS communications • The IRS will waive penalties, with reasonable cause 26

Questions?

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