For tax year 2011, the IRS surprised all of us with the following questions on business tax returns, including Schedule C and Schedule E:
· Did you make any payments in 2011 that would require you to file Form(s) 1099?
· If “Yes”, did you or will you file all required Forms 1099?
In the past, many businesses ignored the rules, or were complacent regarding accurate and timely filing of these informational reports. However, penalties for failing to comply with the reporting requirements have increased significantly.
There are a number of different types of 1099’s, but the most common for small businesses is 1099-MISC. Form 1099-MISC is required to be filed only when the payments are made in the course of your trade or business. Therefore, any personal payments made will not require reporting on a 1099. In addition, it is the current opinion of the IRS that a rental activity is not considered to be a trade or business, therefore payments made in the course of managing your rental property activity will not require 1099 reporting. However, this determination has been a topic of discussion within the IRS and is subject to change in future years.
Payments are reportable on a Form 1099-MISC when all of the following apply:
· The payment was made to a nonemployee
· The payment was made for services rendered to the payer’s trade or business
· The payment was made to an individual, partnership, estate, or in some cases, a corporation (the most common case being attorney fees)
· Payments to the payee totaled $600 or more during the year (this includes payments for parts and materials if supplying the parts and materials was incidental to providing the service)
· The payment was not made electronically (credit card, PayPal, etc…)
There are multiple filing due dates relating to these forms. The forms are due to the recipients by the end of January following the reporting year. The forms must be filed with the IRS by the end of February following the reporting year. Penalties for failure to file accurate and complete forms in a timely manner vary based on the time frame with which the failure is corrected. The penalty timeline is outlined below:
· If failure to file is corrected within 30 days of the required filing date
o $30 penalty per return (that is per each individual 1099) up to a maximum of $75,000 ($250,000 if annual gross receipts exceed $5 million)
· If failure to file is corrected after 30 days of the required filing date, but before August 1st
o $60 penalty per return up to a maximum of $200,000 ($500,000 if annual gross receipts exceed $5 million)
· If failure to file is not corrected or is corrected after August 1st
o $100 penalty per return up to a maximum of $500,000 ($1.5 million if annual gross receipts exceed $5 million)
The penalties will not apply if the failure is due to reasonable cause and not willful neglect, but this could be a hard position to argue. In addition, if the failure is the result of an intentional disregard of the rules the penalty escalates to the greater of $250 per return or 10% of the aggregate dollar amount of the items required to be reported.
Clearly, the 1099 reporting requirements are not something to take lightly. Some accounting software programs have functionality to track this reporting information and to generate the necessary reports at year end. However, these reports are only as accurate as the information provided, which means there may be initial time and costs incurred to implement an automated reporting system, but the savings could be significant in the long run.
As always, please feel free to contact our office at (518) 798-3330 if you have any questions or concerns regarding this issue, or if you would like assistance formatting your accounting software to track this information.
