Dental Check-Up: Form 1099: What You Need to Know

For years, it seems independent contractors have been a headache for the Internal Revenue Service. Their methods of operation and lack of financial reporting have proved elusive for IRS tax collectors. In an effort to encourage proper reporting, many of us are now required to file 1099s.  Furthermore, we are asked to make an affirmative statement that we are complying with the regulations. Please see Holden Sours’ article below, in which we discuss important information in regard to 1099s. I hope you enjoy this edition of Dental Check-Up.

-Bo Elliot

1099s
One of the more notable changes to tax returns in 2011 appears as a simple line item on your business tax return: “Did the business make any payments in 2011 that would require it to file Form(s) 1099?” While this may seem like a short line amidst the numerous questions on your tax return, it can have large consequences. By including this question on your tax return, the IRS is now holding you, the taxpayer, as well as CPAs, responsible to make sure all necessary 1099s have been filed. The next question on your tax return asks, “If yes, did the business file or will file all required Forms 1099?” Answering ”no” to this question can possibly gain the attention of the IRS.

What is a Form 1099?
There are a number of different Form 1099s; however, the question on your tax return specifically refers to Form 1099-MISC. You are responsible for filing this form for any individual, sole proprietor, LLCs not taxed as businesses, or partnerships to whom you have made certain payments of greater than $600 throughout the year. These payments include rent, royalties or non-employee compensation that has not been paid by credit card. You must file a summary Form 1096 to the IRS reporting the amounts of all 1099s filed and you are responsible for giving a copy of the 1099 to the individuals or companies whom you paid.

Who receives a Form 1099?  How is this different from a W-2?
Requirements surrounding 1099s are vast and thus it is likely that all businesses will need to file at least one 1099 each year. Among other items, 1099s are primarily concerned with how businesses classify individuals who perform services for them throughout the year. Individuals are either classified as an employee, who receive wages, or as an independent contractor, who receive non-employee compensation.

If an individual qualifies as an employee, then payroll taxes are withheld throughout the year and their income is reported on a Form W-2.  However, if the individual qualifies as in independent contractor, then no payroll taxes are withheld and you will need to file a 1099 to report their income at the end of the year.  Common examples of an independent contractor relationship include the following: – Amounts paid to janitorial staff, caretakers, landscapers, or domestic workers – Amounts paid to an associate doctor (if they do not qualify as an employee) – Amounts paid to an individual filing in temporarily for an employee – Amounts paid to an individual during a working interview

Who else receives a Form 1099?
Common examples of additional transactions which require 1099s include the following: – Fees for professional services paid to attorneys, physicians, or accountants – Rental payments (such as from a business to an LLC)

Who is exempt for getting a Form 1099?  What if you are unsure? –  All S corporations, C Corporations or LLCs taxed as corporations – All individuals, sole proprietors, and LLCs whom you pay solely by credit card

If you are unsure how to classify a certain individual or company, have them  fill out Form W-9 (easily located on the IRS website) to make the correct determination. This form is only for your records and does not need to be filed with the IRS.  The W-9 has space for the correct SSN or EIN and will also indicate if the entity is a corporation (and therefore does not need a 1099).  It also will supply you with all administrative information (full name, address, etc.) which you will need to include when you actually file Form 1099.  As such, it is important to have the individual in question fill out this form early in the year. If a contractor refuses to return the W-9, you may want to consider finding a new service provider or pay them by credit card only.  If you do not get the tax reporting information in order to properly complete a Form 1099, the IRS requires that you withhold 30% from the vendors check and send it to the IRS.

When do you need to file a Form 1099?
Form 1099 is due to the recipient by January 31 of the proceeding year and copies are due to the IRS by February 28.  If you are planning to electronically file your 1099s, then the due date for federal filing is extended to April 1.  It is important to send the recipient copy to the individual by the January 31t due date for the reason that the amount contained on the 1099 must be reported on the recipient’s tax return. If the recipient does not receive the 1099 in a timely manner then it is likely their own return may be misstated.  There are penalties for failing to file Form 1099s timely that accrue per 1099, per month, and can add-up to a significant amount.

How do you file a Form 1099?
A copy of each Form 1099 as well as Form 1096 (which serves as a summary of all 1099s prepared by the business) must be submitted to the IRS. There are a number of different outlets you may use to file your 1099s including paper file by the practice, electronic file through QuickBooks online, prepared by practice’s payroll service or prepared by practice’s accountant. As a rule of thumb, it is usually more cost effective to have your payroll service prepare and file these on behalf of the practice.

This is not an area to be ignored, as non-filing can lead to penalties and fees. Since most companies are required to file at least one form 1099, answering the questions incorrectly on the return can also open the door to inquiries by the IRS. This is an area where planning ahead can be helpful to avoid problems at year end. If you would like to have our firm help you identify those individuals or companies for whom you might need to file 1099s, please contact Holden Sours at 704.808.5265 or hsours@elliottdavis.com
.

About Bo
As chair of Elliott Davis’ Dental Practice, Bo helps dentists improve how they manage daily financial and operational challenges.  With more than 32 years of public accounting experience, he focuses on tax, audit and consulting services for dental practices and construction clients.

Phone: 704.808.5207 | Email: belliot@elliottdavis.com