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Division of Revenue & TaxationCommonwealth of Northern

Marianas Islands

Clark FletcherInternal Revenue Service

Federal, State and Local Government SpecialistMarch 2, 2010

What is a 1099-MISC information return?

• Form required to report payments for:• Rents (including housing assistance

payments);• Royalties;• Services, or combination of services and

products;• Aquatic products;• Medical and health care; and• Interest or dividends over $600 (for non-

financial institutions)

What payments must be reported?

• Payments of $600 or more for the year• Paid in the course of your trade or

business• All payments to non-corporations• Certain payments to corporations

– gross proceeds to attorneys (box 14)– attorneys’ fees (box 7)– payments for medical or healthcare

services (box 6)

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LLC’s and Reportable payments

• An LLC may be taxed as either a disregarded entity (sole proprietorship), a partnership, or a corporation by election on Form 8832.

• Obtain a W-9 (Rev.Oct_2007) or Form 8832 from the payee to determine their status

(Handout: “tin number”)

One ormore owners

Examples of Payments

Box 7Box 7Non-employee

compensationCommissionsFeesAll forms of

remuneration for services rendered

Other Boxes Other Boxes Rents (Box 1)Royalties >$10 (Box 2)

Prizes & Awards (Box 3)

Medical and health care payments (Box 6)

Medical and Healthcare Payments

• Report payments of $600 or more in Box 6

• Report payments to allindividuals, partnerships, and corporations

• Medical payments include doctor fees, drug testing, lab fees, physical therapy, etc.

* Do not report payments to pharmacies, tax exempt hospitals, or governmental agencies

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Report Non-employee Compensationin Box 7

• Reportable Payments of $600 or more to:– individuals– partnerships– some corporations

• Paid for services of a person who is not your employee

• Payments made in the course of your trade or business

• Reportable payments include:

• commissions, • fees for services (may

include parts or materials in some instances),

• fee splits between professionals,

• referral fees, • director fees (see Boards

and Commissions later)

Payments that should not be reportedon Form 1099-MISC

1. payments to employees; such as fringe benefits or travel reimbursements (note: if not paid as part of an accountable plan, travel reimbursements and auto expenses should be included in wages and reported on W-2)

2. generally, payments to corporations

General Exemptions to Filing Form 1099-MISC

• Payments for merchandise, telephone, inventory, storage, freight, lodging, and similar items

• Examples:• Office Supplies• Photocopier (including installation)

• Payments of rent to real estate agents acting as an agent for the owner

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General Exemptions to Filing Form 1099-MISC

• Wages paid to employees– All compensation, cash or non cash, must be

reported on Form W-2 – Subject to all applicable Federal Employment

Taxes• Unaccountable business travel allowances paid to

an employee– Report on Form W-2– Subject to all applicable Federal Employment

Taxes

General Exemptions to Filing Form 1099-MISC

• Payments to a corporation

• Exceptions:• Payments to medical and health care

providers • Payments to Attorneys for legal

services

Payments to Attorneys

• Section 1031 of the House Bill and Proposed Regulation 1.6041-3 codify the requirement to report payments to attorneys (individuals and corporations)– gross proceeds, and– payments for services of

attorneys• this change was effective for

1998 and later years

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Defining Gross Proceeds

• Gross proceeds are the payments made to an attorney as part of a legal settlement or court order

• Gross proceeds may be issued in the names of the attorney and the client

• Gross proceeds may include an amount for the attorney’s services

Reporting Gross Proceeds

• If you cannot determine the attorney fees, report all of gross proceeds in Box 14– report amount paid in this

format: 300000.00

Reporting Gross Proceeds

Example:An island agency agrees to settle all matters

involved with a property claim for $30,000 and pays the claimant’s attorney for a release.

Form 1099-MISC:Box 14 = 30000.00

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Reporting Gross Proceeds

• If you can determine the amount of attorney fees included in the gross proceeds:– report the fee in Box 7– report nothing in Box 14

(Handout: “Reporting Requirements for Legal Services”)

Reporting Gross Proceeds

Example:An island agency pay $50,000, of which

$15,000 is court-ordered attorney’s fees, in settlement of a law suit judgment.

Form 1099-MISC:Box 7 = 15000.00

Review1099-MISC Box 7 Requirements

1. For services or a combination of services and products, and

2. Payments are $600 or more, and

3. Paid in the course of your trade or business

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Unless...• You meet one of the

exemptions...

Form 1099 Checksheet

[Yes] / [No]

1. Are the aggregate payments $600 or more to any one party for the calendar year?

[ ] [ ]

2. Did you make the payments in the course of your trade or business?

[ ] [ ]

Form 1099 Checksheet

3. Is the recipient of the payments any one of the following: medical corporation, health care provider, legal services corporation, individual, sole proprietorship, partnership, profit or non-profit organization, or joint venture?

[ ] [ ]

• “NO” to any of the above 3 items indicates a 1099-MISC is not required.

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Tax Law Change – IRC 3402(t)

Mandatory income tax withholding by stateagencies and municipalities with >$100M

paymentsThree-percent (3%) on payments > $10,000Effective January 1, 2012Not applicable to US possessions and

territories

When to file Forms 1099-MISC

• Report payments on calendar year basis

• Provide copy of Form 1099-MISC to recipient by Jan. 31 of the following year

• File with DRT by Feb. 28 (paper) or by March 31st (electronic) of the following year

• Use separate Form 1096 transmittal for each type of Form 1099 submitted to DRT

Common Errors that prevent issuance of “correct" or “required” information returns

• Failure to obtain identifying information before making payment (use Form W-9)

• Failure to aggregate payments from all expense categories (use vendor files)

• Assuming payee is a corporation:– because name is “Company or Associates”– because an EIN is furnished– because of LLC designation

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Corrections of Forms 1099-MISC

• Use “Corrected” box when amending an unfiled Form 1099-MISC– Input original information on top Form 1099-MISC,

mark “correct”, then enter correct information on bottom Form 1099-MISC.

• Use “Void” box when amending a filed Form 1099-MISC– Use same process as above.

(Handout “Form 1099-MISC Corrections”)

Corrections of Forms 1099-MISC

Example:Forms 1099-MISC are mailed on Jan. 31st.

On February 20th, a vendor calls and states the amount is wrong. A record check confirms his statement.

What determines if the vendor receives a voided or a corrected Form 1099-MISC?

IRC Section 6721 PenaltyFailure to File correct information

returns by due date

• Correctly file by March 31st* = $15/return

• Correctly file after March 31st but before August 1st = $30/return

• Correctly file August 1st or later = $50/return

(*electronic returns due date)

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IRC Section 6722 PenaltyFailure to Furnish correct payee

statements

• $50 per Information Return, if furnished after January 31st

IRC 6721 & 6722 Penalties

An automatic failure occurs when the information return/payee statement contains errors in the name, taxpayer identification number, and/or amount.

IRC 6671 & 6672 PenaltiesExample:Forms 1099-MISC are issued on Jan. 31st and

filed on March 31st.On June 30th, an internal audit reveals that eight

vendor accounts should have been reported. A second filing of Forms 1099-MISC was completed on July 10th.

What penalties and what amounts can be assessed?

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IRC 6671 & 6672 Penalties

Civil penalties are not self-assessable. The IRS will notify the filer if penalties will be assessed unless the filer can establish a reasonable cause for the delayed filing.

COMMON QUESTIONS• Where do I send the information

returns?

Division of Revenue and Taxation

P.O. Box 5234Saipan, MP 96950

COMMON QUESTIONS

• Can I file an extension to file Forms 1099?– Yes! Send Form 8809 to the address

shown by Jan. 31 for a 30 day extension. • What if I file the information returns late?

– Unless reasonable cause applies, be prepared to pay the 6721 and 6722 penalties.

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COMMON QUESTIONS

• What if I request and can’t get a Form W-9, or the Form W-9 information, from the recipient ?– Backup withholding applies.

• How long do I keep copies of information returns?– Three years from the due date, unless

backup withholding applies (4 years).

Are you required to do Backup Withholding?

• Only if you make reportable payments to persons, businesses, or corporations who have not furnished a valid TIN– the withholding rate is 28% (2006

and thereafter) – backup withholding applies to

many payments reported on Form 1099-MISC, some are:

• box 1 = rents (surface royalties)• box 2 = royalties• box 7 = Non-Employee

Compensation

Backup Withholding

Once a reportable payments has been identified, the payor MUST secure a valid federal taxpayer identification number (TIN). A failure to obtain a TIN or a refusal to provide a TIN initiates the backup withholding tax.

The payor is liable for the tax, whether or not the tax has been withheld from the vendor’s payment.

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When to begin Backup Withholding

• backup withholding begins when aggregate payments for the calendar year equal or exceed $600*, or

• immediately if:1. payee was subject to backup

withholding in the prior year,2. IRS notified the agency to begin

backup withholding on a vendor, or

3. 2-of-3 year rule.• * Includes Interest

When to begin Backup Withholding

Missing/Incorrect/Erroneous TIN Notice Program

Annual notification by the IRS Requires agency to take actions to cure the

errors and update recordsRequires agency to match prior years’

notices to current notice (2-of-3 year rule)

How to report Backup Withholding

• Report withholding to payee and to DRT in Box 4 of Form 1099-MISC

• Form 500_BGRT-BWH is used to report and pay backup withholding to the DRT. – This is an annual return, due 1/31/xx– ordinary deposit rules apply – make backup withholding deposits separate

from Form 500-WH deposits

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Backup Withholding Review

1. Must have reportable payments2. Must be a reportable entity3. Must report correct vendor’s name,

amount, and TIN as shown on Form 1099-MISC

4. Must review prior year’s mismatch notices to identify reportable entities

Verifying TIN’s - check it out !• You may verify any Taxpayer

Identification Number (TIN*) by registering with the IRS’s TIN Matching Program

• Use of the TIN Matching program will reduce the number of TIN/Name mismatches and protect the employer from civil penalties

• Register with IRS e-services

(* TIN = SSN, EIN or ITIN)

Special Reporting Rule for Decedents

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Deceased Employees

The liability for an employee’s taxes depends upon the date of death

Social Security Administration credits an employee’s accrued earnings for the entire calendar year

DRT credits an employee’s actual wages up to date of death

Deceased Employees

An employee’s tax year ends upon the date of death (cash basis)

All income received after date of death accrues to the employee’s estate or beneficiaries

Reporting for FITW* and FICA purposes depends upon date of death

(*Federal Income Tax Withholding)

Deceased Employees

Wages Paid in Year of DeathFor FITW purposes:Secure TIN from beneficiary or estateIssue warrant to beneficiary or estateReport GROSS payment, not actual

paymentIssue Form 1099-MISC (Box 3, Other

Income) to beneficiary or estate

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Deceased EmployeesWages Paid in Year of Death (continued)

For FICA purposes (if applicable)Withhold FICA taxesRecord FICA wages and taxes on Form W-2Issue W-2CM to employee’s last known address

(usually the beneficiary or estate)

Handout: “Reporting Deceased Employee Wages”

Deceased Employees

Wages paid in year of deathSummary:

Separate the FICA wages from taxable income wages

Cease withholding income taxes but continue to report FICA wages and to withhold social security taxes

Deceased Employees

• Wages paid after year of death

Secure TIN from beneficiary or estateIssue warrant to beneficiary or estateIssue Form 1099-MISC (Box 3, Other

Income) to beneficiary or estate

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Deceased Employees

Example:An employee deceases on November 30th and the

employee’s payroll check is electronically deposited on Dec. 10th.

Is FITW and FICA tax withholding required?The employee’s benefits are cashed out and paid

to the beneficiary on Jan. 10th.Is FITW and FICA tax withholding required?

Dec 10th Reporting

Gross wages = $1,200.00<deferral> = $ 200.00Taxable wages* = $1,000.00FITW = - 0 –FICA tax = $ 76.50Net pay = $ 923.50

(*FICA and income tax)

W-2:Boxes 1 & 2 = $ 0.00Boxes 3 & 5 = $ 1,000.00Box 4 = $ 62.00Box 6 = $ 14.50

Form 1099-MISC:Box 3 = $ 1,000.00

January 10th Reporting

Gross payout = $1,200.00Form 1099-MISC:Box 3 = $1,200.00

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Questions?

Employee vs Contractor

Publication 1779

• This publication helps you make a determination about the status of a worker as either an independent contractor or an employee

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• Review the factors involved in worker classification to assure proper tax treatment (Pub 1776)

• Behavioral Control - how, when and where to do the work; training

Independent Contractor or Employee?

Independent Contractor or Employee?

• Financial Control - significant investment, expenses, opportunity for profit or loss

• Relationship of the Parties - employee benefits, written contracts

Employees...

• Required to wear uniforms

• Required to work certain hours

• Required to report to specific locales

• Required to report to specific individuals

•SOME FACTORS THAT MAY INDICATE WORKERS ARE EMPLOYEES

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Employees...

• Owner provides training

• Owner provides supplies and materials

• Worker does not risk of loss of income

COMMON LAW EMPLOYEEIRC 3121(d)(2)

• EMPLOYER HAS RIGHT TO DIRECT AND CONTROL WORKER

• WORKER MAY BE PART TIME OR SEASONAL

• STRANGER, FRIEND, OR FAMILY

• BE SURE INDEPENDENTS ARE NOT TREATED AS EMPLOYEES

IndependentContractor

• makes own schedule• buys own products• has established business presence in

community • furnishes own supplies • furnishes own equipment• makes a profit or loss as a result of his

own business decisions

•FACTORS THAT MAY INDICATE YOU ARE AN INDEPENDENT CONTRACTOR

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Independent Contractor or Employee?

• If you are not sure whether a worker is an employee or independent contractor, complete Form SS-8 and send to:

• Internal Revenue Service• SS-8 Determinations• P.O. Box 1231• Stop 4106 AUCSC• Austin, TX 78767

Questions?

Public Officials and Offices

Determining of employment status for federal income tax purposes does not affect the determination of employment status for Federal Insurance Contribution Act tax purposes

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ELECTED and APPOINTED OFFICIALS

• Must satisfy the definition of “public office holder”

• Elements of public office are determined by governing body and/or court cases

• Island statutes or local ordinances may define the position

ELECTED and APPOINTED OFFICIALS

• Always employees for income tax withholding, maybe employees for social security purposes

• Considered as a special class of employees

• Do not issue Form 1099-MISC in lieu of Form W-2

Boards and Commissions

• Boards and commissions with policy-making authority are elected or appointed officials and may be common-law employee

• Boards and commissions with advisory powers may be common-law employees as volunteers or self-employed

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Boards and Commissions

Example:A citizen is appointed to an island board that

over-sees the operations of the island agency and sets the agency’s policies. The governing statutes stipulate a set rate of compensation based upon meetings attended.

Is the citizen’s compensation subject to FITW and/or FICA tax withholding? Should Form 1099-MISC be issued?

Boards and CommissionsExample:A citizen is appointed to an island

commission that advises an island agency on policy and procedures. The governing statutes stipulate a set compensation based upon attendance.

Is the citizen’s compensation subject to FITW and/or FICA tax withholding? Should Form 1099-MISC be issued?

Questions?

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RESOURCES

• FORMS 1099– Questions 1-866-455-7438

» (8:30 - 4:30 PM EST.)

– E-mail www.mccirp@irs.gov– Forms 1-800-829-3676

» www.irs.gov/publications– “Instructions for Forms 1099, 1098, 5498,

and W-2G” (Catalogue #11409F)

RESOURCES• Federal, State, Local Governments

(FSLG)– www.irs.gov/govts

• Customer Account Services– 877-829-5500 (8:00 am - 9:30 pm EST)

• Washington State, Hawai’i, North Pacific Possessions & Territories – www.Clark.M.Fletcher @irs.gov

• 425-489-4042