Avoid Penalties: What you need to know about 1099-MISC Rules for Services and Rents
By Donna M. Mullin and Vishnu Patel
While the Form 1099-MISC is required for many payments made in the course of your trade or business, the focus of this article is the two most common payments reportable if they are $600 or more, i.e. NEC (nonemployee compensation) reported in box 7 and rents, reported in box 1. There are substantial penalties, discussed below, for failure to timely file and for failure to accurately file these forms.
Step One – Form W-9: Each business or nonprofit organization that makes these types of payments should give all vendors a Form W-9 annually to complete with their legal name, address, TIN (tax identification number), and federal tax classification. If you do not have this information on file to utilize in submitting the information returns, you are required to withhold Federal income tax on the payments. If the vendor supplies a completed W-9, you can rely upon it for reporting purposes and to negate withholding requirements unless and until the IRS notifies you that the information is incorrect. NOTE: a common error is for the vendor to indicate they are a sole proprietor and then fill out the W-9 with a business name only. Sole proprietors must put their name on line 1 of the W-9 and their business name on line 2. While the IRS prefers the social security number of a sole proprietor, if they have an EIN for their proprietorship, that is acceptable.
Step Two – Form 1099-MISC: Timely file your Form 1099-MISC with the IRS via transmittal Form 1096 and supply a copy to the contractor/payee. Copy B and Copy 2 of 1099-MISC must be supplied electronically or mailed to the contractor/payee by January 31, 2019 for 2018 payments. However the due date for submission of Copy A to the IRS varies as follows:
- 1099-MISC reporting NEC in box 7 due January 31, 2019 whether filed via paper or electronically
- 1099-MISC reporting rents in box 1 or other non-box 7 payments due February 28, 2019 if filed by paper and April 1, 2019 if filed electronically
Because the due date varies for box 7 NEC payments versus other 1099-MISC items, the IRS recommends filing the 1099-MISC for NEC payments separately if you cannot file all by the earlier due date to avoid automatic imposition of penalties for late filing. The IRS also tightened up on the allowable reasons for filing Form 8809 extension request for additional time to file and changed the filing addresses for mailed submissions; therefore, review the instructions and don’t assume you can request an extension of time, even if you have done so in the past.
Nonemployee Compensation (NEC)
Generally, a Form 1099-MISC needs to be completed if you paid someone who is not your employee (such as a subcontractor, attorney or accountant) $600 or more for services provided during the year. A copy of the form must be provided to the recipient as well as the IRS by January 31 of the year following payment. You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment. The IRS stresses the importance of the correct information being furnished in the appropriate box as they use this information to determine whether the recipient has properly reported the payment.
Nonemployee Compensation (NEC) is listed in Box 7 of the 1099-MISC. Generally, there are four conditions needed to report a payment as NEC:
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
- You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
- You made payments to the payee of at least $600 during the year.
NEC encompasses professional service fees such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc., and director fees. Fees paid by one professional to another, such as fee-splitting or referral fees are reportable. Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service, are reported.
- Reportable Payments to Corporations: Generally, payments to a corporation (including a limited liability company (LLC) that elects to be taxed as a C or S corporation) are exempt. Rely upon the W-9 for the tax classification of a payee as a corporation. However, you must issue Form 1099-MISC for payments to corporations for medical/health care payments, fish purchases, attorney’s fees/gross proceeds paid to an attorney, tax-exempt interest payments and payments by a federal executive agency for services (vendors).
- Payments to Employees: W-2 wage related items are also not reported on a 1099-MISC. Generally, no employee receiving a W-2 should also receive a 1099-MISC for services rendered while an employee. All payments to employees for services should be reported on Form W-2. This includes wages paid, military differential wage payments, business travel allowances, employee business expense reimbursements, or current life insurance protection.
Report rents paid in the course of your trade or business in box 1 of the 1099-MISC. Ask the landlord to provide you with a W-9 so that you have the correct payee information. You do not need to report these payments on a 1099-MISC if they are paid to a real estate agent or a property manager. However, the real estate agent or property manager would be required to furnish a 1099-MISC to report the rents paid to the property owner. If you are an owner of a rental property or a rental agent, you would also issue Form 1099-MISC reporting NEC paid to the repairmen or other vendors in the normal course of business as long as they met the $600 minimum payment amount.
In general, penalties apply to whoever is required to file these information returns. Penalties can be assessed if you fail to file a correct information return by the due date and you cannot show reasonable cause (timeliness), if you fail to include all information that is required, or if you include incorrect information on the return. Errors and omissions that are inconsequential will not cause penalties; however errors related to (a) a TIN, (b) a payee’s surname, and (c) any monetary amount except amounts protected by the $600 minimum reporting safe harbor are subject to penalties. You can also be penalized if you file on paper and were required to file electronically because you file 250 or more information returns.
The amount of the penalty is based on when you file the correct information return. The penalty is as follows:
- If you correctly file within 30 days of deadline: $50 per form ($547,000 max)
- If you correctly after 30 days and by August 1: $100 per form ($1,641,000 max)
- If you correctly file after August 1: $270 per form ($3,282,500 max)
The IRS reduces max fines for each tier by $186,000, $532,000 and $1,064,000, respectively for filers that are small businesses with less than $5 million in gross receipts for the past three years.
Pennsylvania Specific Rules
Beginning in 2018, anyone who pays Pennsylvania-source income (NEC or Rents) to a resident or non-resident individual, partnership or single member LLC and is required to file a Federal Form 1099-MISC is required to file a copy of the Federal 1099-MISC with the Department of Revenue by January 31 of the next year.
If the payor or lessee must electronically file Pennsylvania employer withholding, the Form 1099-MISC is strongly encouraged to be filed electronically through the department’s e-TIDES system. If there is Pennsylvania withholding, it must be filed electronically. Otherwise, copies are mailed to:
PA Department of Revenue
P.O. Box 280412
Harrisburg, PA 17128-0412
Beginning January 1, 2018, anyone that makes the following payments to non-residents of Pennsylvania is required to withhold from such payments an amount equal to the current tax rate 3.07%:
- Payments of Pennsylvania source non-employee compensation or Pennsylvania source business income to a non-resident individual or disregarded entity that has a non-resident member and is reported on a 1099-MISC. If the work or services are performed outside of Pennsylvania, the withholding obligation does not apply.
- A lessee of Pennsylvania real estate who makes a lease payment in the course of a trade or business to a non-resident lessor.
As this is a new rule the Department of Revenue will not be assessing failures to withhold on the income until after July 1, 2018. NOTE: Withholding is optional for payors or lessees paying less than $5,000 annually. However, if you are unsure of the total amount of payments that will be made during the year, the Department encourages you to withhold and remit income tax from all payments made.
In situations where the payor fails to withhold and remit the required Pennsylvania Personal Income Tax, the Department can collect the Personal Income Tax from the payor. If the payee pays the tax, the Department cannot collect from the payor, but it can collect interest and penalties attributable to any late payment of Personal Income Tax by the payee to the payor.
If you have any questions about 1099 filling requirements or need assistance with filing, please contact us.
Donna M. Mullin JD, CPA is Director and Vishnu Patel, CPA is Associate of the Tax Department for Boyer & Ritter LLC. They can be reached at 717-761-7210 or via email at firstname.lastname@example.org or email@example.com.