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Thursday, January 21, 2016

1099 Reporting Takes on New Prominence as Sharp Penalty Increases Take Effect

Important information regarding 1099 reporting from Parker Tax Pro Bulletin

With hefty increases in information reporting penalties (as high as $250 per late 1099) taking effect on January 1, 2016, timely issuance of 1099s has become a critical imperative for many businesses. The new urgency for timely issuance is compounded by the continued presence of questions on Forms 1065, 1120, 1120S, and 1040, Schedules C, E, and F, asking whether the taxpayer made any payments in 2015 that would require the taxpayer to file Form(s) 1099.
Increased Penalties for Failing to File Correct 1099s
Last June, Congress enacted hefty increases in the penalties imposed under Code Secs. 6721 and 6722 for failures relating to information returns and payee statements. The changes, which were included in the Trade Preferences Extension Act of 2015 (Pub. L. 114-27), took effect on January 1.
Information reporting penalties apply if a payer fails to file timely, fails to include all information required to be shown on a return, or includes incorrect information on an information return (including all variations of Form 1099).
The amount of the penalty is based on when the correct information return is filed. For returns required to be filed for the 2015 tax year, the penalty is:
(1) $50 per information return for returns filed correctly within 30 days after the due date (up from $30 under the prior law), with a maximum penalty of $500,000 a year ($175,000 for certain small businesses);
(2) $100 per information return for returns filed more than 30 days after the due date but by August 1 (up from $60 under prior law), with a maximum penalty of $1,500,000 a year ($500,000 for certain small businesses); and
(3) $250 per information return for returns filed after August 1 or not filed at all (up from $100 under prior law), with a maximum penalty of $3,000,000 a year for most businesses but $1,000,000 for certain small businesses.
For purposes of the lower penalty, a business is a small business for any calendar year if its average annual gross receipts for the three most recent tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5 million.
Observation: This year's increase in information return penalties represents the second time in just a few years that Congress has enacted sharp increases. For 1099s filed after August 1 or not filed at all, taxpayers face a 500% increase in the per-item penalty compared with the pre-2010 amount.
Persons who are required to file information returns electronically but who fail to do so (without an approved waiver) are treated as having failed to file the return unless the person shows reasonable cause for the failure. However, they can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.
The penalty also applies if a person reports an incorrect taxpayer identification number (TIN) or fails to report a TIN, or fails to file paper forms that are machine readable.
The penalty for failure to include the correct information on a return does not apply to a de minimis number of information returns with such failures if the failures are corrected by August 1 of the calendar year in which the due date occurs. The number of returns to which this exception applies cannot be more than the greater of 10 returns or 0.5 percent of the total number of information returns required to be filed for the year.
If a failure to file a correct information return is due to an intentional disregard of one of the requirements (i.e., it is a knowing or willing failure), the penalty is the greater of $500 per return or the statutory percentage of the aggregate dollar amount of the items required to be reported (the statutory percentage depends on the type of information return at issue). In addition, in the case of intentional disregard of the requirements, the $5,000,000 limitation does not apply.
The Protecting Americans from Tax Hikes Act (Pub. L. 114-113) added a safe harbor from the application of these penalties in circumstances in which the information return or payee statement is otherwise correctly filed but includes a de minimis error of the amount required to be reported on such return or statement. In general, a de minimis error of an amount on the information return or statement need not be corrected if the error for any single amount does not exceed $100. A lower threshold of $25 is established for errors with respect to the reporting of an amount of withholding or backup withholding.

Wednesday, January 6, 2016

Who gets a 1099?

Form 1099-MISC is used to report certain types of payments made in the course of a trade or business. If you're in business or self-employed, you may need to submit this report to both the Internal Revenue Service and the person or business that you paid.  The form is filed between January 1st and February 28th.  So who gets a 1099?  Every year this is a question that plagues many business owners. 

Payment types are divided into categories (or boxes) on a 1099-Misc that are detailed below.  Reporting is required if the recipient is an individual, a partnership, an LLC or a sole proprietorship.  You are only required to report if the amount paid is $600 or more.  But remember that the $600 is cumulative throughout the year and not per invoice!

You are not required to report payments made to tax-exempt organizations and for the most part, corporations; however, there are a few exceptions! 1099s must be issued to corporations providing the following services:

  •         Legal (any lawyer/attorney fees)
  •         Medical (doctors and other health institutions, including veterinarians)
  •         Health Care (long term care or hospitals)
  •         Fishing Boat Proceeds


One of the most reported items on the 1099-Misc is the reporting of rents of $600 or more for any of the following:

  •  Real estate rentals paid for office space. (Except if paid to a real estate agent and not directly to the property owner)
  •  Machine rentals (for example, renting a bulldozer).  If the machine rental is part of a contract including both the use of the machine and the operator, the payment for the machine is reported as rent and the operator's charge is reported as nonemployee compensation.
  •  Pasture rentals (paying for the use of grazing land)


Royalties of $10 or more must be reported.  You should report royalties from oil, gas, or other mineral properties before reduction for severance and other taxes that may have been withheld and paid. Surface royalties are categorized as rent.  Likewise, oil and gas payment for a working interest are categorized as nonemployee compensation. 

Other Income

This is used to report $600 or more in payments that are not reportable in one of the other boxes on the form.  Prizes, awards and personal injuries are the most common.

Medical and Health Care Payments

Enter payments of $600 or more made in the course of your trade or business to each physician or other supplier of medical health care services.  There is no exception for corporations, but a 1099 is not required for tax-exempt facilities.  You are not required to report payments to pharmacies for prescription drugs. 

Non-employee Compensation (NEC) or Independent Contractor

By far the most reported area used by small businesses is for services performed by non-employees for repairs or maintenance and for fees, commissions, prizes and awards that you have paid in amounts of $600 or more.  This includes work for plumbing, electrical, carpentry, equipment maintenance, accounting, gardening, horseshoeing, brand inspection and any other service you paid to anyone during the year that was not an employee.  However, a 1099 is not required for payments for merchandise, telephone, freight, storage or similar items.  Therefore, anyone you paid for trucking does not need a 1099. 

The IRS provides the following examples of 1099-Misc recipients:

  • Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.
  •  Fees paid by one professional to another, such as fee-splitting or referral fees.
  • Payment for services and labor (including payment for parts or materials used to perform that service if supplying the parts or materials was incidental to providing the service). For example, report the total payment to an auto repair shop on an invoice showing a breakdown for labor and for parts, if furnishing parts was incidental to repairing the auto.
  •  Payments to nonemployee entertainers for services.
  • Crop Share - amounts paid out of crop/livestock proceeds to another individual or business for their share

 Gross Proceeds Paid to an Attorney

Another common item to report will be any gross proceeds totaling $600 or more paid to an attorney in connection with legal services in the course of your trade or business.  The term attorney includes a law firm or other provider of legal services.  And remember, corporations are NOT exempt in the case of payments made for legal services. 

Crop Insurance Proceeds

Enter crop insurance proceeds of $600 or more paid to farmers by insurance companies unless the farmer has informed the insurance company that expenses have been capitalized under section 278, 263A or 447. 

The 1099 process can be a bit overwhelming, but it is much easier if you collect the proper information as you pay for services throughout the year.  You will need the name, address, tax identification number, the cumulative amount paid over the year and the type of payment (rent, NEC, royalty, etc).  Use IRS form W-9 (obtained by following this link form W-9) to collect the information required for each 1099-Misc.  It’s easy to hand a subcontractor a W-9 before handing them the signed check for payment.  Remember, if ever in doubt, issue the 1099.  There is nothing wrong with issuing when you didn’t need to, but you will face penalties if you don’t issue a 1099 when it is required.

At Gardner & Billing CPAs, 1099 filing is one of the services we offer our clients.  It’s still helpful if you are able to provide the necessary information for your 1099 recipients, but if you prefer to let us make the call on who should receive one, just bring in your farm book or bank statements. 

For more information please contact our office, or follow this link to the IRS 1099 Miscellaneous instructions: