Information and articles for 1099 MISC form reporting requirements. You can electronically file your 2008 1099 MISC forms with 1099reporter

If you're self-employed or have been doing a little moonlighting as a consultant, you may be surprised come tax time when you receive an IRS 1099 MISC form in the mail. If you thought this income would go unnoticed by the IRS, think again. Generally, the IRS rule of thumb includes ALL income in your annual “gross income” unless specifically excluded. The IRS defines gross income as "all income from whatever source derived." So, if you receive compensation for services rendered, the IRS requires you include this income when calculating your income taxes.

For example, if you contract to perform consulting service and the business pays you $600.00 or more in a year for your consulting fees, they are required to report it to the IRS on a 1099 MISC form. In January a copy of the 1099 MISC form will be mailed to you and another copy sent to the Internal Revenue Service. The amount reported on your 1099 MISC form is included in your gross income when filing your income tax return. If you are self-employed, you may want to use Schedule C of Form 1040 to report all of the gross receipts from your business. This, of course, will also allow you to deduct all of your business expenses associated with earnings reported on your 1099 MISC form.

Keep in mind that you need to report all of the income you received from your consulting, not just those amounts you received for which you received a 1099 MISC form. Businesses are only required to report amounts paid to contractors that are $600 or more; however, contractors are required to include ALL income earned–even if the amount is less than $600.

If this is your first venture into the waters of self employment, there may be one or two additional requirements you’ll need to meet for income compliance. You will probably need to get a local business license, State tax ID number and depending on the State you do business in you may be subject to sales tax.

Remember, the best defense is a good offense. Good record keeping is key to ensuring you are prepared should the IRS decide it’s your turn to have your taxes audited.

The 1099 MISC form is used to report payment to non-employees. This 1099 form is due to the contractor before January 31 of the following year. In addition, the employer is required to file a form 1096 to summarize the 1099 MISC form information.

The employer is required to submit 1099 MISC forms (copy A) to the IRS and States (where required) and distribute additional copies to the contractor.

File a 1099 MISC form for each person to whom you have paid during the year:

• At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
• At least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) you purchased from anyone engaged in the trade or business of catching fish, or, generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
• Any fishing boat proceeds; or
• Gross proceeds to an attorney.

In addition, use the 1099 MISC form to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment. You must also file a 1099 MISC form for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.

In tax year 2008, our simple web application will allow you to file 2008 1099 MISC forms digitally. For the current tax year 2007, you can file your 1099 MISC forms manually. Detailed IRS instructions are available, but the following steps outline the requirements.

The manual process:

1. Collect the necessary information for each contractor.
2. Order official Tax Year 2008 forms through the IRS. Youʼll need one 1096 per payer (company) and at least one 1099 MISC form per payee (contractor or other recipient).
3. Fill out a 1099 MISC form for each contractor or recipient.
4. Fill out a second 1099 MISC form in special red drop-out ink for each contractor or recipient to send to the IRS.
5. Review and validate the information on each 1099 MISC form is accurate and complete according to IRS regulation.
6. For each payer (company), fill out a Form 1096 accurately totaling all of the payments on each 1099 MISC form.
7. Mail the black ink 1099 MISC form to each of the respective contractors before January 31, 2009.
8. Mail the red drop-out ink 1099 MISC forms and Form 1096 cover sheet for each payer (company) to the IRS before February 28, 2009.
9. Within several weeks, the IRS will send you notification of any errors found.

The 1099reporter process:

1. Collect the necessary information for each contractor.
2. Enter the information once into our system before January 25, 2009.
3. Receive electronic confirmation the 1099 MISC forms have been mailed, and optionally emailed, to the payees.
4. Receive electronic confirmation the IRS has processed and accepted your 1099 forms.

The IRS sets forth a three-tier penalty structure, which is intended to encourage businesses to file corrected 1099 MISC forms. The structure is time-sensitive and provides for progressively higher fixed per-return penalties with annual maximums.

The 1099 MISC form is generally due on February 28 (not including extensions). 1099 MISC forms filed after the return due dates are subject to the following $15, $30 and $50 per form penalties:

1. 1099 MISC forms corrected within 30 days after the return's filing date, the amount of the penalty is $15 per return, with an annual maximum of $25,000 for small businesses. For nearly all information returns, these penalty rates apply if corrected returns are filed by March 30 (March 31 in leap years) because most information returns must be filed by February 28 (February 29 in leap years).
2. 1099 MISC forms corrected between April 1 and August 1 of the calendar year in which the return was required to be filed, the amount of the penalty is $30 per return, with an annual maximum amount of $50,000 for small businesses.
3. 1099 MISC forms corrected after August 1 are subject to a penalty of $50 per return, with an annual maximum amount of $100,000 for small businesses.

As a 1099reporter customer your 1099 MISC forms are automatically eligible for participation in the IRS Combined Federal/State Filing program (CFSFP). For the IRS to release your 1099 MISC information to the participating State authority you must complete and submit Form 6847 to the IRS.

If your State does not currently participate in the Combined Federal/State Filing Program, you will need to contact the relevant State authority for filing instructions.

Corrected 1099 MISC forms: If you submit a 1099 MISC form for correction through the CFSFP, the IRS will only update Federal reporting information to the participating States. For example, if a correction to non-employee compensation (a field used by Federal and State reporting) is sent to the IRS, then States participating in the CFSFP will be notified of the correction. However, corrections that only affect State reporting requirement should be sent directly to the State (e.g., State withholding amounts).

CFSFP Quick Facts

Participants	AL, AZ, AR, CA, CO, CT, DE, D.C., GA, HI, ID, IN, IA, KS, LA, ME, MD, MA, MN, MS, MO, MT, NE, NJ, NM, NC, ND, OH, SC, UT, VA, WI
Form 6847 Instructions	We are working with the IRS and tax professionals to develop a simple process for tax year 2008
Form 6847	Not yet available for tax year 2008
Mail Form 6847 to	IRS-Martinsburg Computing Center Electronic Filing Coordinator 230 Murall Drive Kearneysville, WV 25430

Under specific conditions, payers making certain payments to payees must withhold federal income tax from those payments at the federal backup withholding rate, which is currently 28%. Backup withholding maybe required if the payee did not provide you with a Taxpayer Identification Number (TIN).

The most common way to obtain a payee’s TIN is to ask the payee to complete IRS Form W-9, Request for Taxpayer Identification Number and Certification. Typically, as long as the payee provides the payer with the TIN, no backup withholding is required. If a TIN is not provided, backup withholding is required from any payments until the TIN is provided. For payments reportable on 1099 MISC form, any backup withholding should be reported in box 4.

Although backup withholding is usually not required when a payee furnished a TIN, it may still apply in cases where a TIN that was furnished does not match the name reported on the payee’s 1099 MISC form. The IRS generally makes the payer aware of any mismatches by providing Notice CP2100 or CP2100A (depending on the volume of mismatches).

These notices identify both missing and incorrect TINs. A missing TIN is one that has not been provided, has more or less than nine numbers, or has an alpha character in one of the nine positions. An incorrect TIN is one that is in the proper format but the name/TIN combination cannot be found in the IRS database. For more information on Backup Withholding requirements see IRS Publication 1281.

If a contractor fails or refuses to provide you with an EIN or TIN you are still required to file the 1099 MISC form with the IRS. While accuracy is always important, your primary concern should be your obligation to timely report amounts you paid to contractors. If you have reasonably complied with the reporting requirements then your business has created a safe-harbor position should the IRS review your information reporting practices.

If you fail to timely file or correctly file your 1099 forms, your business is subject to the penalty structure imposed by the IRS for Penalties for late 1099 MISC form filing.

Use Form W-9 to Collect the EIN or TIN from the Contractor

As a best practice for your business, you may want to request that all independent contractors complete and sign IRS Form W-9 (IRS Form W-9 instructions) and return it to you. By retaining a signed W-9 form you will be able to demonstrate to the IRS that your business used due care in complying with the IRS information reporting requirements. Further, if the information reported on the 1099 MISC form is incorrect or incomplete the W-9 form will serve as a record of the information provided by the contractor.

B-Notices Requirements

B-Notice requirements are generally imposed on businesses that have an obligation to backup withhold on amounts reported on Information Returns. However, if you do not have a TIN or EIN for the recipient, you are required to backup withhold at the rate of 28% of the gross amount being reported. See IRS Publication 1281 for more information on backup withholding requirements.

What’s the difference between an Independent Contractor and an Employee?

It is often difficult for small businesses to determine whether an employment relationship is an employer-employee or employer-independent contractor relationship. There are obvious advantages to hiring contractors as it affords the business owner more flexibility in their hiring practices and minimizes withholding and reporting requirements.

Under the employer/employee relationship employers are required to collect and maintain copies of Form I-9 and Form W-4, collect and deposit federal and state income tax withholding, Social Security and Medicare (FICA), report wages paid to the employee on Form W-2, pay the employer’s matching portion of FICA, provide Unemployment Insurance (FUTA), comply with COBRA, FMLA and other various employment compliance programs. Conversely, the compliance requirements for the employer are significantly reduced under an independent contractor relationship. In many cases, the employer is only required to report the compensation paid to the independent contractor on the 1099 MISC form.

As a general rule, a worker is considered an independent contractor if he or she is subject to the direction or control of another for the purpose of outlining the work to be accomplished, but not as to the means and methods by which the work is accomplished.

Individuals such as doctors, lawyers, dentists, veterinarians, construction contractors and others engaged in the pursuit of an independent trade, business or profession in which they offer their services to the public generally are independent contractors and not employees.

The IRS has a long history of challenging employment classification and historically has uses 20 key factors set out in Revenue Procedure 85-18 to assist in determining the worker status. The 20 key factors test, commonly referred to as the 20-factor test, evaluates the extent of control the employer exercises over the work. Not all of the factors exist in all business relationships and each relationship must be evaluated separately.

The following five key factors should be reviewed in determining an employer-independent contractor relationship:

1. Is the individual engaged in an independent, licensed business or distinct occupation requiring a special skill and has the opportunity for profit or loss (e.g., attorney, accountant, programmer, consultant, etc.)?
2. Does the individual have an investment in tools or equipment necessary to perform the work (e.g., computers, printers, software, phones or other tools)?
3. Does the individual employ workers or other helpers (i.e., subcontractors)?
4. The individual does not have a regular or semi-permanent working relationship with the employer.
5. Is the individual performing a different kind of service than that provided by the employer?

The same twenty factors used to determine if a worker is an employee also determine if a worker is an independent contractor.

Training materials released by the IRS on worker classification indicate that the reimbursement of expenses does not necessarily mean that the reimbursed individual is an employee. However, the IRS will focus on non-reimbursed expenses to distinguish between employees and independent contractors, since it is more likely that independent contractors have expenses that are not reimbursed. These training materials also state that when a worker is compensated on an hourly, daily, weekly or similar basis, the worker is guaranteed a return for labor, which is generally indicative of an employer-employee relationship–even if the wage or salary is accompanied by a commission. The training materials note, however, that some lines of business, such as law, typically pay independent contractors on an hourly basis.

Statutory Employees

Some workers are automatically classified, by law, as employees by the IRS, and therefore, are not considered by the IRS under the 20-factor test.

In determining whether a worker is an employee or an independent contractor, the business should initially determine if the worker is a "statutory employee" or a "statutory independent contractor." If the worker is neither, then the business should next assess the worker's status under the 20-factor test.

Statutory employees are considered employees for FICA tax, and, in some instances, FUTA tax, but not for Federal income tax withholding.

Statutory employees include:

• agent-drivers or commission drivers engaged in distributing products such as meat, vegetable or bakery, beverages (other than milk) or laundry or dry cleaning;
• full-time life insurance salespersons;
• home workers doing jobs according to firm's specifications on materials provided by the firm (and where worker returns product to the firm); and
• full-time traveling or city salespersons soliciting orders from wholesalers or retailers, for merchandise for resale.

The following factors also indicate a statutory employee:

• the contract of service contemplates that the worker will personally perform substantially all of the work; and
• the worker has no substantial investment in the facilities; and
• there is a continuing work relationship with the firm.

Statutory Independent Contractors

Certain workers are independent contractors by law. These workers are exempt from withholding requirements, Social Security and Medicare (FICA), and Federal Unemployment Tax Act (FUTA) taxes. Statutory independent contractors include licensed real-estate agents (who meet specific requirements) as well as direct sellers of consumer products in "the home or otherwise than in a permanent retail establishment."

Real-estate agents

A licensed real-estate agent is an independent contractor, by law, if the following conditions are both met:

1. The agent's remuneration for services is substantially related to sales or other output (including appraisal activities), rather than to the number of hours worked.
2. The written contract for the agent's services provides that the agent is not to be treated as an employee with respect to such services for federal employment tax purposes.

Direct sellers

A direct seller is an independent contractor. A "direct seller" is defined as any person engaged in the trade or business of selling (or soliciting the sale of) consumer products to the ultimate consumer or for resale to a buyer on a buy-sell basis, a deposit-commission basis, or any similar basis, provided the sale or resale of the product occurs in a place other than in a permanent retail establishment.

Substantially all of the remuneration received by the direct seller must be directly related to sales or other output (rather than to the number of hours worked).

Also, the services of the seller must be performed under a written contract between the seller and the firm. The written contract must provide that the seller will not be treated as an employee with respect to such services for federal employment tax purposes.

Summary of Employment Classification

Remember to consider whether the worker is statutorily (by law) placed in either of the two following groups:

• Statutory Employees: Such as corporate officers, certain drivers, home service workers, traveling salesmen
• Statutory Independent Contractors: Such as real-estate agents, direct sellers

If there is some question as to whether or not a person is an independent contractor of employee, the following practices may help convince the IRS the person is truly an independent contractor.

• The business and contractor have a signed written agreement attesting to the fact that she is an independent contractor.
• The contractor bills the business for the services rendered.
• The contractor is required to have her own worker's compensation coverage.
• As much independence as possible is given in areas such as hours worked, where the job is performed, etc.
• The contractor provides her own tools, supplies, training, transportation, etc.