As we approach the end of January, it is important for all NFPs to remember to prepare and issue 1099s. Every business, whether for profit or not-for-profit, should send 1099s to all non-corporate service providers that it paid more than $600 to in 2014. There are two exceptions to the rule regarding payments to corporations. Payments to attorneys or payments for medical or healthcare services which exceed $600 need to be reported on a 1099 even if the payee is incorporated. Payments of rent, royalties or interest also need to be reported on 1099s.
What happens if you do not issue 1099s? The IRS can assess penalties for failure to file Forms 1099. The penalties range from $30-$100 per missed 1099, depending on how late the forms are. The maximum penalty is a total of $1,500,000 for large businesses and $500,000 for small businesses. In addition to the late penalty, there is a second onerous penalty that can be assessed for failure to comply with the 1099 rules. That penalty is back-up withholding. If you cannot provide the IRS with an employer identification number or social security number for a payee who should have received a 1099, the IRS will assess back-up withholding. Back-up withholding is 28% of the amount that was paid to the payee.
When the IRS audits a not-for-profit entity, they will generally review a sample of the organization’s disbursements to determine if there have been any missed 1099s. If it finds any, the organization will be required to file the forms late. If the organization cannot provide the agent with an EIN/SSN for the payee, proof that the payee is incorporated, or a Form 4669 from the payee which attests that the payee included the income on its return, the organization will be charged with back-up withholding. If 1099s are properly filed each year, this headache can be avoided. Please remember that there is a line item on the 990 asking for the number of 1099s that an organization issued. If your return shows zero, you may be at risk for an audit, particularly if Part 9 of your 990 shows legal fees or other service fees that would normally require 1099s.
In order to avoid assessment of back-up withholding, not only should you make sure you issue 1099s on time, but you should also request that a Form W-9 be completed by all of your vendors. A W-9 form is a request for an EIN or social security number, as well as a request of the vendor’s entity type. If your vendor checks the box that it is a corporation, no 1099 will be required to be issued. Having completed W-9s will allow you to avoid assessment of back-up withholding if a 1099 is missed. It will not eliminate the failure to file a penalty of $30-$100 per 1099, but will provide protection from back-up withholding. As we start a new year, this might be a great time to make sure you have W-9s from all of your vendors.
If you have any questions about 1099s or W-9s, please contact your service provider at CSH. If you are not sure if one of your vendors should receive a 1099, remember it is better to over report than to under report. There is no penalty to you if you issue a 1099 to a corporation.
For more information contact Jane Pfeifer at [email protected].