© 2012 financial operations networks llc 1099-misc update: what’s reportable in 2012 and beyond...

© 2012 Financial Operations Networks LLC

1099-MISC Update: What’s Reportable in 2012 and Beyond

and Potential Risks

www.TheAPNetwork.com

About Your Presenters

John FoertschbeckCPA

John has more than 20 years experience in providing and managing tax compliance services and consulting related to tax reporting software and associated full services. He has been responsible for the management of consultation and implementation services of tax software for clients (Fortune 500) that present complex business models in the integration and conversion process. Specific experience includes providing service directly to clients for the purposes of managing and maintaining compliance with information reporting requirements for 1099, W-2, 1042-S payments to the IRS, SSA and state agencies. He was also responsible for researching all requirements regarding information reporting and ensuring that the solutions provided were functioning in full compliance. John has a B.S. in Accounting from the University of Maryland.

Formerly, John was with the Tax Controversy Services Group for Deloitte Tax, LLP, managing services to U.S. and international companies for both 1099 and 1042-S regulatory reporting, certification and withholding.


About Your Presenters

Lynda FoertschbeckExecutive Vice President, IRSCompliance, Inc.

Linda has more than 25 years experience as a tax compliance professional in the development of compliance solutions of regulatory consulting services and tax software applications. Prior to joining IRSCompliance Lynda served as Manager in the Tax Controversy Unit at Deloitte Tax, as Vice President and Compliance Product Manager at DISC, Incorporated (now CheckFree) and Director of Compliance Services for Moore, BCS.

Ms. Foertschbeck’s experience includes the development and enhancement of many proven tax software and service solutions for 1099, W-2, 1042-S processing and reporting to the IRS, SSA and state agencies. This includes products from: 1099PRO, Convey, FASTTAX, ATSG Inc., MOORE BCS and CheckFree. Specific areas of contribution have included the direction and development of information reporting products and service lines, regulatory compliance support services and strategic business needs analysis.


Form 1099-MISC

• Corporate 1099-MISC reporting repealed!— Would have required 1099-MISC reporting for

the sales of “goods”— Would have required 1099-MISC reporting to

Corporations

• Pilot Program allowing for TIN truncation has been extended through 2012 for certain payee statements, including Forms 1099-MISC (see Notice 2011-38)


Form 1099-MISC (Cont’d.)

• IRS TIN Matching may be required for payees receiving payments for services (Senate proposal)― No match = backup withholding

• Form 1099-K – the new reporting and withholding requirement for reimbursing merchants



• Reports information at source if engaged in a trade or business - IRC Chapter 6041— Generally, payments of $600 or more— Specifically excludes wages paid to employees, tips and

qualifying payments from flexible spending arrangements and health reimbursement arrangements

— Specifically includes nonqualified deferred compensation (“NQDC”) payments for nonemployees

— Not reported on Form 1099-MISC if specific income is reported on 1099-INT, -K, -PATR, -DIV, -R, or royalties on 1099-S



• Gather Necessary Information Required for State

Reporting and Withholding - Services— States set their payment thresholds which may differ

from the federal threshold

— If payment is for services – where is the service

provided – on U.S. soil or in a foreign country?

— If service is performed in the U.S., what state was the

service provided in?

— If the service provider’s residence state is different than

the state where the service is provided• Additional state reporting may be required

• Mandatory state withholding may be required 7



— Reporting is required to the state where the service is performed• Applies to both U.S. and foreign payees

• Gather Necessary Information Required for State Reporting and Withholding - Rent— States set their payment thresholds which may differ from

the federal threshold

— If payment is for rent – where is the property located – on U.S. soil or in a foreign country?



— If property is located in the U.S., what state is the property located?

— If the property owner’s resident state is different than the state where the property is located• Additional state reporting may be required

• Mandatory state withholding may be required

— Reporting is required to the state where the property is located• Applies to both U.S. and foreign payees



• Gather Necessary Information Required for State Reporting and Withholding - Royalties— States set their payment thresholds which may differ from

the federal threshold — If payment is for royalties – where are the royalties earned?

What country? If the country is U.S. – what state? — If the payee’s resident state is different than the state where

the property is located• Additional state reporting may be required• Mandatory state withholding may be required

— Reporting is required to the state where the royalties are earned

• Applies to both U.S. and foreign payees


Ensure the Payee is Accurately Documented

• Increase your efficiencies and effectiveness of payment processing, maintaining the Vendor Master and apply regulatory procedures consistently with regard to the issuance of payments

• Must identify payees as U.S. or foreign vendors— U.S. Vendors (U.S. Citizens and Resident Aliens):

• Determine if payee is U.S. Citizen or Resident Alien• Is the payment is reportable? (You do determine if the payee

is reportable – it is the payment that you must evaluate)


Ensure the Payee is Accurately Documented (Cont’d.)

• Determine if the payee has provided their TIN, Name and Tax Status and if that information has been accepted

• If the payee has not provided the information – withhold 28% federal tax

• State withholding may also apply


What if the Payee Is Foreign?• Foreign Payees – Miscellaneous Payments

— Determine whether foreign vendors earned U.S. source fixed or determinable income and how much U.S. source income they earned

— Obtain documentation from foreign vendors who earned U.S. source fixed or determinable income• Form W-8• Validate the information provided by the foreign payee on the

W-8


What if the Payee Is Foreign? (Cont’d.)

• Must include a U.S. issued TIN• If a Form W-8 is completed correctly and includes a U.S. TIN

and if Tax Country declared has treaty with the U.S., withhold the rate of tax specified in the treaty for the type of income paid


Foreign Payees – Miscellaneous Payments• For each type of income paid – A completed W-8 is

required

• Additional documentation may be acceptable

• When are you required to withhold 30%?— When the payee does not provide or provides an

incomplete Form W-8— The Form W-8 does not include a U.S. issued TIN— The Tax Country of the foreign payee does not have a treaty

with the US


Foreign Payees – Miscellaneous Payments (Cont’d.)

— The Tax Country has a treaty with the U.S. but does not provide for a reduced rate of withholding for the type of income paid

— The Form W-8 has expired (3 year rule)— There has been a change in the status of the foreign payee

which invalidates the existing Form W-8


TIN Solicitations U.S. Resident and Non-Resident Aliens• Payers are required to withhold 28% if the payee fails

to provide a TIN or a certified Form W-9, and the payer can be reasonably assured that the payee is a U.S. resident

• A payer or withholding agent is required to withhold 30% on any payment made to a payee who is a foreign person, if the payer cannot establish that the payee is a foreign person entitled to a reduced rate of withholding (Form W-8 or other information).


TIN Solicitations U.S. Resident and Non-Resident Aliens (Cont’d.)• In general, if you receive a Form W-9 from the payee,

you will report this information on a Form 1099. If you receive a Form W-8, you may have to file a Form 1042-S and withhold under the rules applicable for payments made to a foreign person. TIN = Tax Identification Number


TIN Solicitations• Form W-8 Series:

— Form W-8BEN - Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.

— Form W-8 ECI - Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States.

— Form W-8EXP - Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding.

— Form W-8IMY - Certificate of Foreign Intermediary, Foreign Partnership, or Certain U.S. Branches for United States Tax Withholding.


TIN Solicitations (Cont’d.)

• Form 8233 – Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual


2012 Form 1099-MISC


2012 Form 1099-MISC (Cont’d.)


Form 1099-MISC

• What to report— Box 1 - Rents of all types - IRC Chapter 6041— Box 2 - Certain royalty payments of $10 or more - IRC

Chapter 6050N— Box 3 - Other income - IRC Chapter 6041— Box 4 - Backup withholding and withholding on Indian

gaming profits - IRC Chapter 3406 and IRC Chapter 3402(r)

— Box 5 - Proceeds from fishing boat operators - IRC Chapter 6050A



— Box 6 - Medical and health care payments – IRC Chapter 6041; also see Rev. Rul. 69-595 and Rev. Rul. 70-608

— Box 7 - Nonemployee compensation (including NQDC) - IRC Chapter 6041

— Box 8 - Substitute payments of $10 or more in lieu of dividends or tax-exempt interest - IRC Chapter 6045(d)

— Box 9 - Payments for services and direct sales - IRC Chapter 6041A

— Box 10 - Crop insurance proceeds - IRC 6041; also see Rev. Rul. 78-110, Rev. Rul. 80-22, and Rev. Rul. 82-93



— Box 13 - Excess golden parachute payments - IRC § 6041; box 13 subject to 20% additional tax

— Box 14 - Gross proceeds paid to attorneys - IRC § 6045(f)— Box 15a and 15b - NQDC under section 409A— Boxes 16 thru 18 – State Information



• Corporations are exempt from Form 1099-MISC reporting, except for the following payments:— Medical and health care payments (Box 6)— Fish purchases for cash (Box 7)— Attorney’s fees (Box 7)— Payments by a federal executive agency to vendors for

services (Box 7)— Substitute payments in lieu of dividends or tax-exempt

interest (Box 8)— Gross proceeds paid to attorneys (Box 14)



• Box 3 - Other Income— Use for items not specifically reportable in one of the other

boxes• Prizes and awards that are not for services• Taxable damages including punitive damages and damages for

nonphysical injuries or sicknesses• Delayed claim interest (non-contractual)• Deceased employee wages paid in year following year of death• Indian gaming profits



• Payments to former employees while serving in the Armed Services (effective 1/1/2009, differential military pay is treated as wages, reportable on Form W-2)

• Certain termination payments made to former self-employed insurance agents (requires a 1 year covenant not to compete)



• Box 4 – Federal Income Tax Withheld— Enter backup withholding amount— Also enter any income tax withheld from payments to

members of Indian tribes— YOU ARE REQUIRED TO FILE FORM 1099-MISC FOR

EACH PERSON FOR WHOM YOU HAVE WITHHELD ANY FEDERAL INCOME TAX, REGARDLESS OF THE AMOUNT OF THE PAYMENT



• Box 6 - Medical and Health Care Payments— Payment is at least $600— Made in the course of your trade or business to a physician

or other supplier or provider of medical or health care services

— Reportable payments include payments made for drug testing, injections, dentures, and similar items

— Payments made to pharmacies for prescription drugs are NOT required to be reported

— Corporations are not exempt from Box 6 payment reporting



• Box 7 - Nonemployee Compensation— Generally subject to self-employment tax

• Fees for services (including attorney’s fees and Director’s fees)• Commissions (commissions paid to statutory employees are

reported on Form W-2)• Prizes and awards for services as a nonemployee• Fish purchases for cash• Oil and gas payments for a working interest• Federal executive agencies to vendors for services• NQDC (including amounts paid because the plan failed to meet

the requirements of IRC Chapter 409A; this amount also included in Box 15b)



• Box 7 - Nonemployee Compensation— When to report

• Payment is at least $600 (including the value of taxable fringe benefits)

• Made to someone who is not your employee• Is made for services in the course of your trade or business• Payment is made to an individual, partnership, estate, or in

some cases a corporation



• Box 14 - Gross Proceeds Paid to an Attorney— Report gross payments made in your trade of business in

connection with legal services (i.e., legal settlements)— Attorney’s fees paid for services provided to you by your

attorney are reported in box 7, not box 14— Reporting may be required in Box 14 to an attorney, and

some or all of the same payment may be reportable to the claimant on Form 1099-MISC and/or another Form, such as Form W-2 or Form 1099-R

— Corporations are not exempt from Box 14 payment reporting



• Box 15a - Section 409A Deferrals— Report the total amount deferred under Chapter 409A plans

during the current year, including earnings on current year and prior year deferrals

— Box 15a reporting is not required for tax year 2011 reporting (see Notice 2008-115) and is suspended until Treasury and the IRS issue further guidance

• Box 15b - Section 409A Income— Report all amounts deferred, including earnings on amounts

deferred, that are includible in income because the NQDC plan fails to meet the requirements of Chapter 409A

— The amount included in Box 15b is also included in Box 7



• Boxes 16 thru 18 – State Information— Combined Federal State Reporting Program (“CFS”)— States may have different reporting thresholds— Box 16 – State Tax Withheld

• Backup withholding• Non-resident withholding (i.e., CA)

— Box 17 – State/Payer’s State Number— Box 18 – State Income

• Combination of federal reportable amounts



• For amounts paid in 2011 and thereafter, logos, slogans and advertising will not be permitted on Forms 1099-MISC (or any Forms 1096, 1098, 1099, 5498, W-2G and 1042-S)


Questions

© 2012 Financial Operations Networks LLC

Thank You!

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