As we near the end of January, it is important for all organizations to remember to prepare and issue 1099s, as these forms are due to the recipients by January 31st each year. 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 2015. In addition, payments of rent, royalties or interest also need to be reported on 1099s. There are two exceptions to the rule regarding payments to corporations:
- Payments to attorneys or payments for medical or healthcare services which exceed $600 must be reported on a 1099, even if the payee is incorporated.
What happens if you don’t 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. The penalties apply if you fail to file on time, fail to include all information required to be shown, or include incorrect information on a return. If there is an intentional disregard of the payee statement requirement, the penalty is at least $250 per payee statement with no maximum penalty. In addition to the late penalty, there is a second, onerous back-up withholding penalty that can be assessed for failure to comply with the 1099 rules. If you cannot provide the IRS with an employer identification number (EIN) or social security number (SSN) for a payee who should have received a 1099, the IRS will assess back-up withholding, which is 28% of the amount that was paid to the payee.
When the IRS audits an organization, they will generally review a sample of the organization’s disbursements to determine if there have been any missed 1099s. If any are found, 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 that 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. Be aware that there is a line item on all business returns (1120, 1120S, 1065, Form 1040 Schedule C, E, F, etc.) asking if payments have been made that would require a 1099 filing and if the 1099s have been filed. For 990s, there is a question that asks for the number of 1099s that were issued. If your return shows legal fees or other service fees that would normally require 1099 filings, and you haven’t filed any, you may be at risk for an audit.
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 SSN, 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 (with the exception for legal and healthcare fees mentioned above). Having completed W-9s will not eliminate the failure to file penalty of $30-$100 per form if a 1099 is missed, but will allow you to avoid assessment of 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 are not sure if one of your vendors should receive a 1099, remember that it is better to over report than to under report. There is no penalty to you if you issue a 1099 to a corporation. If you have any questions about 1099s or W-9s, please contact your CSH advisor.