If you own your own business, and regardless of whether you operate as a sole proprietorship, LLC, partnership or corporation, you are required to issue Form 1099-MISC to independent contractors and the IRS if you paid the contractor $600 or more in the preceding calendar year for services performed by the contractor for your business.
If you work closely with your tax professional for tax preparation and tax planning services, you are aware that it is a best practice to procure Form W-9 from the contractor before services are performed, and definitely before payment is made for those services. Why? Once the contractor is paid, he has less motivation to provide you with a complete and accurately prepared Form W-9. This W-9 form can be found on the IRS website, www.irs.gov.
What does the IRS do with the Form 1099-MISC it receives? The IRS’s computers match up the total revenues earned by the payee per the 1099s received against the revenues reported by the taxpayer (payee). If the taxpayer reported less revenues on its return than the IRS is showing per the 1099s received, a notice is sent to the taxpayer requesting an explanation for the difference.
Sometimes when the IRS receives the 1099s from the business owners, the name, SSN, or EIN of the service provider do not match the IRS’s records. In other words, the IRS cannot match up this revenue with a tax return. The IRS then sends the payor a notice that the information submitted on the 1099s is incorrect. The business owner is then required to contact the payee (contractor) and request that the correct information be supplied; otherwise backup withholding may be required. The IRS refers to this as sending the payee a “B Notice”. The B Notice informs the payee to complete the Form W-9 with the correct information or be subject to back-up withholding at a rate of 28%. This means that the payee is only receiving 72% of the contracted service agreement and will not be a happy service provider.
One common reason for such a discrepancy is that the person completing the W-9 is using a DBA or fictitious name rather than the legal name of the contractor as registered with the Dept. of State and the IRS. The IRS is very specific as to how the payor must contact the payee and the language to be used in the B Notice(s). Readers can refer to IRS Publication #1281 found at www.irs.gov for guidance.
If the payee fails to respond and the business continues to do business with that contractor, and the business receives a second notification from the IRS within 3 years from the date of the previous IRS notice of a mis-match, the payor is required to send another B Notice, referred to as a “Second B Notice”. When the Second B Notice is sent, the payor must receive validation of the payees’ name and TIN (taxpayer identification number) to stop or prevent backup withholding. This verification process is explained in the #1281 publication. In the IRS’s recently released Revenue Procedure 2014-43, the IRS says that effective August 1, 2014 if the payee sends the payor a copy of his social security card, such action will in certain situations be considered verification for those payees who use SSNs and backup withholding is not necessary.
In summary, it is VERY important for a business to obtain Form W-9 from every service provider before services are rendered. It will save you lots of headaches from dealing with an irate provider, responding to IRS notices about the Form 1099 discrepancies, sending out B notices to your vendors, withholding federal taxes from your contractors, remitting those withheld taxes to the IRS in the hope that the payor receives credit for those withheld taxes, and even the IRS making your business responsible for paying 28% of the amount paid to the contractor for ignoring the backup withholding rules.
If you want to learn more about Form 1099 reporting requirements and how to deal with vendors who refuse to provide form W-9 or are unable to complete the form correctly, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
