Congress, led by House Republicans, enacted legislation last week that retroactively repealed the very unpopular and expanded Form 1099 legislation that was enacted as part of the health care reform legislation passed in 2010. This is great news for (1) taxpayers (landlords) who receive rental income and (2) for all small business owners. The repealed legislation had required taxpayers who own rental property to issue Form 1099-Misc to service providers (e.g., plumbers, contractors, CPAs, etc.). More information about the old reporting rules for rental property owners can be found by reading our December 23, 2010 blog. The rules for small business owners had also been expanded to include the reporting of payments made to providers of goods and to corporations and to report the monies paid to these persons by showing the payments made by calendar month. The repealed legislation was very onerous and costly to small business owners.
What are the current Form 1099 reporting rules? The current rules are essentially the same as those that were in effect before the enactment of the 2010 health care legislation. IRC section § 6041(a) states that “All persons engaged in a trade or business and making payment in the course of such trade or business to another person . . . of $600 or more in any taxable year . . .” must report the amount and the name and address of the recipient to the IRS and to the recipient. The type of payment that most commonly triggers the reporting requirement is payment for services or rent paid to a landlord. Payments made to corporations (with some exceptions) need not be reported and payments made to providers of goods need not be reported. Thus, if a business makes a payment to its IT professional for services provided and purchases a new network, printers and PCs from Dell Computer, only the payment relating to the IT service provider needs to be reported (if such payment was for at least $600). The payment for goods (e.g., inventory, equipment, supplies) need not be reported under the current rules. How does the small business owner know if the payee is a corporation? If the payee has Corp., Corporation, Incorporated, Inc., or P.C. in its company name, then the payer can assume that the payee is a corporation and is exempt from reporting. What happens if the payer sends a Form 1099-Misc to a corporation? There is no penalty for sending a Form 1099-Misc to a party that is not required to receive one. Thus, some business owners find it easier to send a Form 1099-Misc to every payee receiving more than $600 than to segregate corporate payees from non-corporate payees. Likewise, there is no penalty for sending a Form 1099-Misc to a service provider who charged the company less than $600 for services.
Business owners, to minimize 1099 IRS compliance issues and penalties, need to request a completed Form W-9 from all service providers BEFORE services are rendered. To procure a Form W-9 from a vendor is much easier to obtain before the contract is awarded or payment for services is made, than afterwards. Form W-9 is a form completed by the payee that shows its legal name, mailing address, EIN, and whether the payee is subject to IRS backup withholding requirements. The payee signs this form under penalties of perjury. Having this form in a business’s files is metaphorically a “get out of jail for free card” as it can be used to avoid penalty assessments and the backup withholding required by the IRS on payments made to these payees. The W-9 form can be downloaded from the IRS website at http://www.irs.gov/.
If the payee calls the payer and states that the amount shown on the 1099-Misc is incorrect, remember that the payer is required to report these payments each calendar year for payments made during that calendar year. Thus if the payer makes a payment to the payee during the last week in December of the calendar year, the fact that the payee did not receive the payment until the first week of January in the subsequent calendar year is irrelevant to the payer. A competent tax advisor can explain how the payee should handle this situation on the payee’s tax return since the IRS will match the 1099 statements against the revenues reported by the payee.
The new legislation did not repeal the increased penalties for non-compliance which became effective January 1, 2011.