Ten Things You Should Know About 1099s

They’re arriving in the mail now. Don’t ignore them, or you could be buying trouble with the IRS

OK, this is no one’s favorite topic. As a taxpayer, you probably hate receiving 1099s. If you’re in business, you probably hate sending them out. In fact, no one likes 1099s except the IRS. The agency loves them because they allow its computers to keep tabs on ordinary taxpayers, even while it audits less than 1% of all individual tax returns. The IRS matches nearly all 1099s and W-2s (those are the wage report forms from your employer) against your 1040. In fiscal 2008 it sent 4.8 million notices to taxpayers saying that based on those matches, they owed more. By contrast, it audited fewer than 1.3 million returns. Here are 10 things you need to know about the 1099s hitting your mailbox now.

1. It’s better to give than receive.

This time of year they’re inevitable. Generally, businesses must issue the forms to any payee (other than a corporation) who receives $600 or more during the year. And that’s just the basic threshold rule; there are many, many exceptions. That’s why you probably get a Form 1099 for every bank account you have, even if you earned only $10 of interest income.

2. There are many varieties of 1099.

There’s a 1099-INT for interest; 1099-DIV for dividends; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions and barter exchanges; 1099-S for real estate transactions, etc. In fact, there’s a dizzying array. There are many categories, but the Form 1099-MISC (for miscellaneous) seems to prompt the most questions and covers the biggest territory.

3. Timing is everything.

Normally, businesses must send out Forms 1099 on or before Jan. 31 of each year for the prior calendar year. This year the IRS gave some types of payers a reprieve until Feb. 16. That means you should watch your mailbox carefully a little longer this year. Some businesses send a Form 1099 at the same time they send you a check so they won’t have to send you a form later. That means you might receive a Form 1099 at any time of the year. So keep a lookout for Forms 1099 with checks during the year and put them in a safe place. Don’t assume you’re off the hook for reporting income if you don’t receive a Form 1099 by February or even March. There are penalties on companies who issue 1099s late, but I’ve seen some arrive as late as April or May. That may mean you will already have filed your tax return. If so, there’s usually no obligation to amend your tax return as long as you thought it was correct when you filed it.

4. Beware changed addresses.

Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number. That means you have an interest in making sure payers have your correct address. Update your address directly with payers, as well as putting a forwarding order in with the U.S. Post Office. You’ll want to see any forms the IRS sees.

5. The IRS gets them, too.

Any Form 1099 sent to you goes to the IRS too–often a little later. The normal deadline is Jan. 31 for mailing 1099s to taxpayers, but the payer has until the end of February to send all its 1099s to the IRS. Some payers do send them simultaneously to taxpayers and the IRS. Most payers mail taxpayer copies by Jan. 31, and then wait a few weeks to collect all of the IRS copies, summarize them and transmit them to the IRS, usually electronically. That’s important knowledge, so don’t let it go to waste.

6. Report errors immediately.

The time delay means you may have a chance to correct obvious errors. So don’t just put arriving 1099s in a pile; open them immediately. Suppose you get a 1099-MISC on Jan. 31 reporting $8,000 of pay, when you know you received only $800 from the company that issued the form? Tell the payer immediately. There may be time for the payer to correct it before sending it to the IRS. That’s clearly better for you. If the payer has already dispatched the incorrect form to the IRS, ask the payer to send in a corrected form. There’s a special box on the form to show it is correcting a prior 1099–so the IRS doesn’t just add the amounts together!

7. Report every 1099.

The key to Forms 1099 is the IRS’ computerized matching. Every Form 1099 includes the payer’s employer identification number and the payee’s Social Security (or taxpayer identification) number. The IRS matches nearly every Form 1099 with the payee’s tax return. If you disagree with the information on the form but you can’t convince the payer you’re right, explain it on your tax return. Example: Suppose you received a $100,000 payment from your car insurance company to cover your medical expenses and pain from whiplash you suffered in an accident. A payment for personal physical injuries is excludable from income, and it shouldn’t normally be the subject of a Form 1099. If you haven’t succeeded in convincing your insurance company to cancel the 1099, try to explain it on your tax return. One possibility is to include a zero with a “see note” on line 21, the “other income” line of your Form 1040. Then in the footnote, show something like this:

8. Payment erroneously reported by XYZ insurance on Form 1099: $100,000

Amount excludable under Section 104 for personal physical injuries: $100,000

Net to Line 21: $0

There’s no perfect solution, but one thing is clear: If you receive a Form 1099, you can’t just ignore it, because the IRS won’t.

8. IRS “dunning letters.”

No one likes a tax audit, and there are numerous tales about what will provoke one. But this much is clear: If you forget to report the $500 of interest you earned on a bank account, the IRS will send you a computer-generated letter billing you for the tax on that interest. If it’s correct, just pay it.

9. Consider state taxes, too.

Most states have an income tax, and they will receive all the same information the IRS does. So if you missed a 1099 on your federal return, be aware that your state will probably catch up with it, too.

10. Don’t ask.

Keeping payers advised of your current address is a good idea, as is reporting errors to payers. But that’s where I’d stop. In other words, if you don’t receive a Form 1099 that you expect, don’t ask for it. If you are expecting a Form 1099, you no doubt know about the income, so just report that amount honestly on your tax return. The IRS computers have no problem with that. In my experience, if you call or write the payer and raise the issue, you may be buying trouble. The payer may issue the 1099 incorrectly. Or you may end up with two of them, one issued in the ordinary course (even if it never got to you) and one issued because you called. The IRS computer might end up thinking you had twice the income you really did.

Forms 1099s are a vital part of the IRS’s computer matching program, and nearly all of us receive payments reported in this way. Take these forms seriously. I assure you the IRS does.


CPA in Miami Tips on Top 10 Payroll Mistakes

CPA in Miami warns that the Internal Revenue Service is focused on closing the tax gap

One way the IRS hopes to do so is by collecting under-withheld employment taxes. As part of the Employment Tax Research Project (ETRP) launched in 2010, the IRS is reviewing the payroll practices of 6,000 employers and CPA in Miami in four main areas: worker misclassification, fringe benefits, executive compensation and payroll taxes. Once the research project is complete, the IRS will identify areas in which compliance errors routinely occur and focus audits on those issues. CPA in Miami VieraCPA advises companies not selected as part of the research project should look at their payroll practices and make any necessary corrections before the IRS comes knocking. We have already observed the IRS paying a lot more attention to employment tax issues and pursuing penalties with a diligence we have not previously witnessed in this area. As a CPA in Miami we are seeing an expanded audit scope and depth of diligence by the IRS, we’ve put together a list of common payroll mistakes we’ve seen companies make. We recommend that companies, at a minimum, look at these issues:

1.CPA in Miami help Classification of Employees as Independent Contractors

Workers are generally classified as either employees or independent contractors. Getting this classification right is a big deal. Depending on the classification, how compensation gets reported to the IRS is different (Form W-2 vs. Form 1099). Whether the worker is entitled to benefits (like medical insurance coverage, retirement plan benefits and grants of equity compensation) can hinge on the worker’s status as an employee. Whether a worker is subject to federal income tax and employment tax withholding is also contingent on status. If there has been an improper classification, the Voluntary Classification Settlement Program (VCSP) allows eligible employers to voluntarily reclassify workers as employees on a prospective basis and get into compliance by paying 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.

2. Failure to Subject Vendor Payments to Backup Withholding

If a company issues a payment to a vendor without first obtaining a Form W-9, the payment could be subject to mandatory backup withholding at a 28 percent rate. Even when it is later determined that the vendor is not subject to backup withholding (for example, the vendor is later determined to be a corporation), if the company did not obtain a Form W-9 prior to issuing payment, there may still be an issue: on audit, the IRS has pursued the collection of a failure-to-deposit penalty on the amount that should have been withheld—because at the time of payment, the company did not know that the vendor payment was exempt from backup withholding.

3. Failure to Issue Form 1099s

A Form 1099 must generally be issued to vendors, including independent contractors, who provide more than $600 in services. Some entities, such as corporations, are not required to be issued a Form 1099. If a company fails to timely furnish a Form 1099, it can be subject to penalties.

4. Not Including the Fair Market Value of Gift Cards, Prizes and Awards in Employees’ Income

For federal income tax purposes, most prizes and awards are considered taxable fringe benefits subject to federal income and employment tax withholding. Gift cards are the equivalent of cash and should always be included in taxable wages regardless of amount. Certain items can be excluded from wages if they are de minimis in nature. However, cash equivalents are never de minimis.

5. Failing to Timely Deposit Withheld Taxes

Generally, a company is required to deposit taxes on a monthly or semi-weekly basis. When taxes reach certain amounts, they must be deposited the next business day. If a company doesn’t timely deposit these taxes, the company may be subject to late deposit penalties and interest. CPA in Miami notes penalties rates range from 2 to 15 percent, depending on how late the deposit is.

6. Failure to Timely Deposit Withholding Taxes on Vested Restricted Stock and Exercise of Stock Options

When an individual exercises stock options, employment taxes should be deposited within one day of the settlement date. The settlement date should not be more than three days after the date of exercise. However, when an employee is granted restricted stock, he or she generally recognizes income upon vesting. Income and employment taxes are required to be withheld on the fair market value of the shares less any amount the employee paid for such shares on that date. The income and employment taxes may be required to be deposited the next business day.

7. Incorrectly Excluding Expense Reimbursements from Reportable Wages

Whether expense reimbursements can be excluded from an employee’s wages depends on whether he or she is reimbursed pursuant to an accountable plan. An accountable plan is generally one under which expenses are reimbursed only if there is a business connection to the expenditure, there is an adequate accounting of the expenditure and any excess reimbursements are returned to the employer. If expenses are reimbursed under a policy or plan that does not meet these requirements, they must be included in taxable wages.

8. Failure to Include Nonqualified Deferred Compensation in Executives’ Incomes

If nonqualified deferred compensation plans have not been amended to comply with Internal Revenue Code Section 409A or have provisions that do not comply with 409A, the executives could have an income recognition event prior to the payment of the deferred amounts and could be subject to an excise tax. The Service has also established a correction program where taxpayers can obtain some relief with respect to certain operational failures. Only certain types of failures are eligible for correction, but taking advantage of this program can reduce the total amount of income inclusion and excise taxes.

9. Not Including the Appropriate Value of Taxable Fringe Benefits in Employees’ Income

Taxable fringe benefits can also include spousal travel, company-provided automobiles, country club dues and housing benefits. How a company values these fringe benefits for purposes of income and employment tax reporting and withholding can be a complicated issue. For example, there are three valuation methods for calculating the value of personal use of company-provided vehicles. Is your company calculating this correctly?

10. Excluding Travel and Commuting Expense Reimbursements from Employees’ Income

Most of the time, travel and commuting expenses are not taxable income to an employee. However, if what started out as a short-term assignment is extended beyond a year, or if an employee is traveling to a permanent work site that is not in the same place as his or her permanent residence, those company-provided travel and commuting benefits may need to be included in the employee’s income.