Employee Miss-Classification Amnesty

 

For many years, many employers have miss-classified employees as independent contractors, which is in violation of Federal and State law.  The IRS has an amnesty program called Voluntary Classification Settlement Program (VCSP).  It is important to note that many states do not have a similar program and will levy heavy penalties for miss-classification of employees.

Employers are now allowed to voluntarily reclassify workers as employees and receive relief from payroll taxes otherwise owed and will not notify the state.  Traditionally there is an exchange of information program between the IRS and many states, but in this case the IRS has promised to omit VCSP from information sharing. To qualify the employer must (1) consistently treated the workers as nonemployees, (2) filed all required Form 1099s for the workers in the previous three years, and (3) is not currently under audit by the IRS or the Department of Labor. The IRS is providing temporary relief through 6/30/13 to allow taxpayers, who have not filed all required Form 1099s for the previous three years and modified eligibility requirements to allow taxpayers under IRS audit, other than an employment tax audit, to participate in the VCSP program.

Because there might be unintentional employment legal issues one should consult with a labor attorney first.

Please contact our office if you need more information

Are You Required to File 1099s?

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2012 must be provided to the independent contractor no later than January 31 of 2013.

It is not uncommon to, say, have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9 is provided by the government as a means for you to obtain the data required to file the 1099s for your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS.

To avoid a penalty, copies of the 1099s must to be sent to the IRS by February 28, 2013. They must be submitted on magnetic media or on optically scannable forms.

This firm provides 1099 preparation services. If you need assistance or have questions, please give this office a call.

WHAT IF A PAYEE REFIUSES TO COOPERATE WITH THE PREPERATION OF 1099s

As part of the 1099 process, payees are required to provide their Tax Identification Number which is either their Social Security Number or Corporate ID Number. But what happens if a payee refuses? What do we do then?

Per the IRS, the 1099 still needs to be prepared and sent to the IRS, but with the tax identification Number blank. Then send the payee the following:
(1) A copy of the 1099 that is being sent to the IRS
(2) Form W-9, which is the form that the payee reports their Tax Identification Number to you
(3) A letter, on company letterhead, informing them that (a) The enclosed 1099 is being provided to the IRS,(b) Requesting them to return the enclosed completed orm W-9, (c) The IRS will assess a penalty against them for refusing to provide their tax identification number and (d) 28% will be withheld from all future payments
(4) A return envelope

You need to keep copies of all of this in a file to show the IRS that you did your best effort to get the payee’s Tax Identification number.

The IRS will then assess you a $50 penalty. The penalty can be waived if copies of the above are provided

If you need help in preparing 1099s, please give us a call today at 562-912-4334.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

Be prepared to provide 1099s

Form 1099s are the counter part to the W-2s, they are for payments made by all types of business and nonprofit organizations for non payroll payments like interest, dividends or self employment income. There are 16 different types of 1099s and are due to recipients by January 31, 2011 and to the IRS by February 28, 2011. Listings of these are at the bottom of this blog.

One of the more prevalent 1099s is the1099-MISC, which is for Miscellaneous Income. 1099-MISC covers the following:
(1) Royalties or broker payments in lieu of dividends or tax-exempt interest
(2) Services (including parts and materials). If you received less than $600 in the year a 1099 is not required to be provided
(3) Rents
(4) Prizes and awards
(5) Other income payments

Payments to Corporations are exempt except for the following:
(1) Medical and health care payments
(2) Fish purchases for cash. “Fish” means all fish and other forms of aquatic life
(3) Attorneys’ fees
(4) Substitute payments in lieu of dividends or tax-exempt interest
(5) Payments by a federal executive agency for services

NEW PENALTIES FOR FAILURE TO FILE INFORMATION RETURNS

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year. The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the recently passed Small Business Jobs Act of 2010, those penalties have been doubled. The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts. Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

In addition, the minimum penalty for each intentional failure-to-file act increases from $100 to $250.

Rental Owners Included in the Reporting Requirement Effective in 2011 – Effective for 2011 filings due in 2012, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. The new law does provide the IRS with the ability to permit exceptions to the filing requirement for hardship cases and when minimal rental income is received, but neither “hardship” nor “minimal” are yet defined.

In order to comply with these requirements and avoid these substantial penalties requires collecting the payee’s name, SSN number and contact information before making payment. If you need assistance setting up a procedure for collecting the required information or filing your information returns for the year, please give us a call at 562-912-4334

2009 Tax Strategy XI – Be prepared to receive your 1099

Form 1099s are the counter part to the W-2s, they are for payments made by all types of business and nonprofit organizations for non payroll payments like interest, dividends or self employment income. There are 16 different types of 1099s and are due to recipients by February 1, 2010 and copies to the IRS by March 1, 2010. Listings of these are at the bottom of this blog.

One of the more prevalent 1099s is the 1099-MISC, which is for Miscellaneous Income. 1099-MISC covers the following:
(1) Royalties or broker payments in lieu of dividends or tax-exempt interest
(2) Services - If you received less than $600 in the year a 1099 is not required
(3) Rents
(4) Prizes and awards
(5) Other income payments

Payments to Corporations are exempt except for the following:
(1) Medical and health care payments
(2) Fish purchases for cash. “Fish” means all fish and other forms of aquatic life
(3) Attorneys’ fees
(4) Substitute payments in lieu of dividends or tax-exempt interest
(5) Payments by a federal executive agency for services

There are detailed rules in preparing and filling a 1099. To get more detailed information, visit the IRS web site www.irs.gov/pub/irs-pdf/i1099gi_09.pdf

Listing of 1099s
Form 1099-A: Acquisition or Abandonment of Secured Property
Form 1099-B: Proceeds from Broker and Barter Exchange Transactions
Form 1099-C: Cancellation of Debt
Form 1099-CAP: Changes in Corporate Control and Capital Structure
Form 1099-DIV: Dividends and Distributions
Form 1099-G: Certain Government Payments
Form 1099-H: Health Coverage Tax Credit (HCTC) Advance Payments
Form 1099-INT: Interest Income
Form 1099-LTC: Long Term Care and Accelerated Death Benefits
Form 1099-MISC: Miscellaneous Income
Form 1099-OID: Original Issue Discount
Form 1099-PATR: Taxable Distributions Received From Cooperatives
Form 1099-Q: Payments from Qualified Education Programs (Under Sections 529 and 530)
Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 1099-S: Proceeds from Real Estate Transactions
Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA