Publications
01.27.12
Tips for Businesses to Avoid 1099 Compliance Penalties When Paying Contractors
When we think of tax filing deadlines, we often think of March 15th or April 15th, the most common due date for federal income tax returns. For tax returns on extension, the September 15th or October 15th deadlines always loom. However, equally important but not often held in the same regard is the January 31st filing deadline. This is the deadline that applies for most “information returns.” This includes primarily Forms W-2 and Forms 1099. While most businesses readily comply with the Form W-2 filing requirements, many do not fully grasp the importance and nuances of Form 1099. Possibly the most prominent in compliance failure is with respect to Form 1099-MISC, the form used to report amounts paid to independent contractors.
Penalties for failure to file required Forms 1099-MISC are generally $50 per form and can quickly become significant amounts for multiple failures. Recently, the American Payroll Association (APA) issued a press release including some basic tips on how to avoid IRS penalties when paying independent contractors. With the filing deadline only days away we thought this would be a good time to give you our take on these tips.
1. Form 1099-MISC required for noncorporate service providers.
If you paid any service provider at least $600 for services during 2011 you must provide Form 1099-MISC to them no later than January 31, 2012. If the provider is a corporation you do not have to provide Form 1099-MISC.*
*You must provide Form 1099-MISC to sole proprietorships, partnerships and attorneys or medical service providers who do business as corporations. The only way to know with certainty if a service provider is a corporation is to have them complete IRS Form W-9, Request for Taxpayer Identification Number and Certification. This form should be obtained from all contractors prior to payment. If not already obtained, we suggest you request it now.
2. If you paid electronically, skip the 1099.
You’re no longer required to send service providers a Form 1099-MISC if you paid for their services with a credit card, debit card, gift card or another electronic payment medium, such as PayPal. The bank or credit card company that made the actual payment will send the contractor a Form 1099-K.
3. TIN truncation pilot program extended through 2012.
The IRS is extending the Taxpayer Identification Number (TIN) truncation pilot program through 2012 for 1099s that are filed in 2012 and 2013. Payees’ TINs may be truncated on their paper copies but forms filed with the IRS must contain their full TINs. Under the truncation procedure, the first five digits are replaced with either asterisks or Xs: ***-**-1234 or XXX-XX-1234.
4. Better safe than sorry!
If you are unsure whether a Form 1099-MISC is required, go ahead and send one. You can’t go wrong sending more 1099s than are required but you set yourself up for penalties if you do not send all qualified service providers their Form 1099-MISC.
5. Don’t be late.
As noted above, the forms must be distributed to the payees no later than January 31, 2012. Regarding the IRS copies, you must mail them no later than February 28, 2012 or file electronically by April 2, 2012 with the IRS.
For more information on these regulations, please contact Kevin Jones at kjones@argy.com.
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