Let’s spend a little time talking about Form 1099-MISC miscellaneous filing requirements, backup withholding and the recent increases to information return penalties. Even though businesses use the form 1099-MISC to report their payments to nonemployees to the IRS, the issue is so closely related to employment tax, that it bears discussion today. The Internal Revenue Code requires a business to report payments to the IRS for services rendered by non-employees if the business paid the non-employee $600 or more during the calendar year.
Reportable Payments in Box 7, Nonemployee Compensation, on Form 1099-MISC
Businesses that make reportable payments to non-employees in the course of their business must report those payments in Box 7, Nonemployee Compensation, on Form 1099-MISC. Also, the payer must remember to furnish a copy of the Form 1099-MISC to the recipient or payee, and to file a copy of the 1099-MISC with the IRS. That is an important point to remember. A business should always secure the Taxpayer Identification Number, or TIN, for the workers it makes reportable payments to, so the business can properly report those payments on the Form 1099.
Form W-9, Request for Taxpayer Identification Number and Certification
You can use Form W-9, Request for Taxpayer Identification Number and Certification, to obtain the payee or recipient’s TIN. There are exceptions to the Form 1099-Miscellaneous filing requirements. For example, currently, payments to corporations, including limited liability companies that are treated as a C or S corporation, generally aren’t required to be reported on Form 1099-Miscellaneous unless the payments were for legal services and medical or health-care services. Does a business have to withhold reportable payments it makes no nonemployees?
Backup withholding for reportable payments to certain individual
Yes, there are situations that call for businesses to make what we call backup withholding for reportable payments to certain individuals. In 1983, the backup withholding provisions of Internal Revenue Code Section 3406 set forth the requirements for withholding from certain reportable payments. Presently, the backup withholding rate is 28%; however, although the rate has generally remained at 28%, the rate could change, so make sure you consult the IRS website to ensure that you’re using the appropriate withholding rate for your specific year.
Payers of reportable payments
Payers of reportable payments must withhold federal income tax from such payments, if the payee fails to provide the payer with a taxpayer identification number or provides one that is obviously incorrect; for example, a TIN with the wrong number of digits or a TIN that includes an alpha character, or the payee is notified by the IRS that the TIN provided by the payee is incorrect.
When do businesses have to start backup withholding for these workers?
When do businesses have to start backup withholding for these workers? Generally the payer must begin backup withholding on all reportable payments immediately at the time of the first payment if the payer never received the payee’s taxpayer identification number or discovers that the TIN provided is incorrect. In essence, as soon as the payer knows that there is a problem, they should start backup withholding. If the payer has been notified by the IRS that the payee’s TIN is incorrect, the payer should follow the instructions on the notice the IRS sends to the payer with respect to starting and stopping backup withholding. And how long should the business make backup withholding?
Where does the payer report these backup withholdings?
The payer should continue with backup withholding until the payee provides the payer with a valid taxpayer identification number. Where does the payer report these backup withholdings? Backup withholding withheld from non-employee compensation must be reported in Box 4 of Form 1099-Miscellaneous.
Payers must furnish a copy of Form 1099-Miscellaneous to the non-employee by January 31st and file a copy with the IRS by February 28th of the year following the year of the payment. I think we should note here that generally the payer may be liable for the tax required to be withheld, whether or not the payer made the proper withholding from the payee’s compensation. Also, the payer reports and remits the backup withholding to the IRS on Form 945, Annual Return of Withheld Income Taxes.
Are there any other consequences related to Form 1099, Reporting Compliance and Backup Withholding?
The IRS has compliance programs in place to review information returns, including Forms 1099 and to identify those with possible noncompliance related to backup withholding. There are potential penalties for such noncompliance, some of which have recently increased. The information return penalties are related to Code Sections 6721 and 6722. Section 6721 pertains to the failure to file correct information return, and Section 6722 pertains to the failure to furnish correct payee statements. The penalties per information return depend on when they were correctly filed, and the penalties have a maximum penalty per year.
Penalties for forgetting backup withholding
The revised penalty rates per information return for Code Section 6721 and 6722 are $50, $100, or $250 per information return, with maximum penalties of $500,000, $1.5 million, and $3 million per year. The recent increase in penalties applies to the returns in statements required to be filed after December 31st, 2015. There are also lower maximum penalties for small businesses, which are defined as taxpayers with gross receipts of not more than $5 million.
Increased penalty for forgetting backup withholding
As mentioned earlier, failure to backup withhold from reportable payments may result in penalties asserted using Internal Revenue Code Section 6672, Trust Fund Recovery Penalties. This is the penalty imposed on the responsible person we talked about earlier.