(Reprinted from the December 1998 issue of The Cash Flow Connection Newsletter)
Chestnuts, open fires, Jack Frost, a mail box full of catalogs, Sunday papers twice the normal size…it must almost be….tax season. The holiday season is just a short six days away from the end of another tax year. While April 15 looms as the dreaded tax deadline, there are actually quite a few filing deadlines in January that affect many cash flow professionals. It may understandably be the last thing on your mind, but don’t be caught unaware. We’ve compiled a basic primer for some of the more common 1099 and 1098 tax form filings utilized in our business. Just remember, we don’t make the rules!
As a general rule, every person engaged in a trade or business must report to the IRS any payment of $600 or more made to any person during the calendar year for items such as rent, compensation for service, commissions, interest and annuities. To make these filings, the IRS has provided a series of 1099 forms.
A 1099-MISC is usually filed for each payee on reportable compensation type payments of $600 or more made to non-employees and/or independent contractors. These are frequently issued to report referral fees paid by note buyers to consultants/note brokers.
Form 1099-DIV and 1099-INT
If your business is incorporated, your corporation will have to file a Form 1099-DIV for each person to whom it pays dividends of $10 or more each year. You will also file Form 1099-INT for each person to whom you pay $10 or more in interest on bonds, debentures or notes issued by the corporation in registered form. These 1099 forms are also required for any other payment of dividends or interest on which you are required to withhold tax.
Form 1099-S and 1099-B
In general, Form 1099-S must be given to recipients of the proceeds from the sale of real estate, while Form 1099-B is given to recipients of the proceeds from the sale of securities. Typically, these forms are handled by the escrow, closing or funding agent; however, it never hurts to verify that it has been appropriately filed.
Federal law requires that you give From 1098 to any individual from whom you receive $600 or more in mortgage interest during the year in the course of your trade or business. Form 1098 generally has the same filing requirements as the various 1099 forms. If payments are made by the payor to a third party escrow, collection, or servicing company, chances are this is being handled.
The appropriate form is prepared for each reportable party and sent to the IRS with a duplicate form sent to the individual payee. You must also prepare and file a Form 1096 summarizing all the information on the forms in the 1099 series. Each of these forms is due to the IRS by February 28 of each year for the prior calendar year. A copy must also be sent to the recipient of the payment by January 31.
There are stiff IRS penalties for not filing the appropriate 1099 forms. First, there is a $50 penalty for failure to obtain an appropriate tax identification number and/or filing late. There is also a penalty for not filing or not giving a 1099 to a payee, which runs $50 per failure. Since there is a separate penalty for not giving a copy of the 1099 to the payee, as well as for not filing a copy with the IRS, it can cost your $100 for each person for whom you fail to prepare 1099’s.
Fortunately, a number of important exemptions from the 1099 filing requirements will eliminate most of the people or companies to whom you are likely to make payments of $600 or more. You do not have to report:
- Payments to corporations
- Payments of compensation to employees that are already reported on a W-2
- Payments of bills for merchandise, telephone, freight, storage, and similar charges.
- Payments of rent made to real estate agents
- Expense advances or reimbursement to employees
- Payments to a governmental unit
If your business files 250 or more returns for a calendar year, the IRS requires an electronic or magnetic media filing. These returns include Form 1098, the Form 1099 series, the W-2 series, and various others. The electronic filing is in lieu of actual paper forms and includes very specific formats for the computer tape or disk which must be met.
This overview should assist the cash flow professional in identifying potential filing requirements. This is not intended as tax advise so please review your specific situation with a qualified tax advisor. Free tax publications and forms can be obtained by from the IRS at 800-829-3676 at www.irs.gov