New Year brings annual payroll and information return requirements

Raechel Taddei, BridgeTower Media Newswires

It’s that time of year again. Along with New Year’s resolutions and budgets being made, businesses must complete and timely file their annual payroll and information returns.

IRS code section 6041 states that “all persons engaged in a trade or business ... shall render a true and accurate return to the Secretary under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary.” The term “person” means all business entities, including non-profit/tax-exempt organizations. “A true and accurate return” is referring to Form 1099. The penalties for non-compliance have been increasing and can be substantial. The penalties for 2019 Form 1099s due in 2020 for small businesses with gross receipts $5 million or less are shown in the accompanying chart.

There are two due dates for 1099-MISC filings:

• If amounts are reported in box 7, the due date is January 31st for sending the 1099 to the recipient AND to the IRS.

• For amounts in other boxes of the 1099-MISC, January 31st is still the due date for sending the 1099 to the recipient. However, the end of February is the due date to send paper forms to the IRS or March 31 if e-filing the IRS copies.

• The 1099s with box 7 amounts can be mailed in with transmittal Form 1096 by January 31st. The other 1099s can then be sent in a later mailing to the IRS with a separate Form 1096. However, if you mail box 7 1099s to the IRS after January 31st and include other types of 1099s, the IRS will consider ALL of the forms to be late even if the other types may be technically filed on time (i.e. by February 28 or March 31). That will trigger the per-form penalties listed above for all of the forms.

What are the guidelines for a 1099-MISC filing requirement? $600 or more in the following types of payments necessitates a 1099-MISC filing:

• Contract Labor (i.e. non-employee compensation) (box 7)

• Rent (box 1)

• Other Income (i.e. prizes, etc.) (box 3)

• Medical and health care services (box 6)

• Payments to an Attorney (box 7 or 14)

However, the threshold is only $10 or more for royalties reported in Box 2 of 1099-MISC.

A 1099-MISC should be sent to individuals, partnerships and estates. Generally 1099s are not issued to corporations, but there are exceptions to this. If a business pays legal fees to a law firm, a 1099 needs to be sent even if the law firm is a corporation. Attorney fees for legal work are reported in box 7. Money paid to attorneys as part of legal settlements is reported in box 14. In those cases a 1099-MISC might need to be sent to the other party of the settlement, too, with the amount reported in box 3 as other income.

What about LLCs? That depends on how the LLC is taxed. A one-person LLC taxed as a sole proprietor and a multi-member LLC taxed as a partnership both require 1099s be issued. An LLC that has elected to be taxed as an S-Corp or C-Corp does not require a 1099 unless it is a law firm.

The question that often arises regarding contract labor reported in box 7 (self-employment income) is whether the contractor is correctly classified as an independent subcontractor or should actually be considered an employee. An employee designation will mean payroll taxes and related tax returns, along with workers compensation and disability insurance issues. A contractor will mean no payroll taxes and just the reporting on 1099-MISC if they are paid $600 or more. The IRS gives guidance to help determine the proper classification. Some factors considered are behavioral control, financial control, and the nature of relationship. For example, does the paying business tell the person when to show up, how to do the job, provide the training and tools, and supervise the work? This would indicate that the person is an employee. If the worker follows their own processes and procedures, using their own tools/ equipment, then they’re probably a contractor. Consider who has the financial risk in the relationship.

It is best practice for a business to require a completed, signed Form W-9 before paying a contractor. The W-9 will contain the tax ID number, name, address and tax entity type, which are all necessary to determine the 1099-MISC requirement and completion. It can often be difficult to track down contractors (especially after they have already received payment!) to obtain this information in January when attempting to complete the 1099 filing on time.

Do rental owners need to issue 1099-MISC for payments to contract labor and professional services related to their rental properties? Section 6041 says a “trade or business” must issue 1099s.
The question of whether a rental property is a trade or business is complicated and the answer is not straightforward. Rental property can be considered either a trade or business under Section 162 or an investment property under Section 212. If the rental is classified as a trade or business, then 1099s will need to be issued for qualifying payments.

For payments reported in box 6, the IRS defines medical or health care services as: “the prevention, diagnosis, treatment and management of disease, illness, or injury by a professional.”
Interestingly, the IRS considers veterinary services to be “health care” services, so farmers may have a 1099 requirement for payments to their vet.

How does Form 1099-K interact with 1099-MISC? Form 1099-K reports payments from third-party processors (such as PayPal) or from credit/debit card transactions. All credit/debit card transactions are reported. Third-party processor transactions are reported if there are more than 200 transactions and more than $20,000 is processed. Form 1099-K is a form a business will receive, not a form they will issue. If a business pays a contractor with a credit/debit card or via PayPal, the business does not need to issue a 1099-MISC to the contractor because the transaction falls under the 1099-K rules. That prevents double reporting to the IRS of the payment to the contractor. This is covered under Treasury Regulation 1.6041-1(a)(1)(iv). However, ACH or EFT transactions are still subject to 1099-MISC reporting because they are not “payment card” transactions.

For 2020, the IRS has released a new form called Form 1099-NEC. This form will be used for reporting non-employee compensation (currently box 7 on the 1099-MISC) for filings due next year in January 2021.

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Raechel Taddei is an Enrolled Agent and Tax Manager with Mengel, Metzger, Barr & Co. LLP. She may be reached at rtaddei@mmb-co.com.