Transcript Federal 1099 Reporting - AP, AR & Financial Operations

Federal Information Reporting: 1099/1042-S Reporting
IAPP Chapter Meeting
Minneapolis, MN
April 15, 2010
Sean C. Evans
DuCharme, McMillen & Associates, Inc.
Senior Tax Manager-Tax Advisory Service and Training
[email protected]
913-269-7912
Major Changes to 1099 Misc. Reporting
The recently passed Patient Protection & Affordable Care Act
(H.R. 3590) or “Healthcare Bill” included changes to
information reporting requirements starting in 2012 as follows:
• Elimination of the corporate exemption for 1099
reporting. AP departments will be required to report 1099
forms for most entities that do business with their
organizations. Until now, this applied only to service providers
that invoiced the business for payments of more than $600 a
year but excluded service providers that were incorporated.
Slide 2
Major Changes to 1099 Misc. Reporting
• Addition of tangible property in 1099 reporting
requirements. AP departments will have to submit 1099s for
vendors that provide not just services, as dictated by current
law, but also any that provide them more than $600 worth of
physical goods in a calendar year.
• Reporting of insurance premium payments. Employers
will be required to report on W-2 forms the value of the
healthcare they’re offering to their workers. It’s still unclear
whether that applies to just the part paid by the employer, just
the part paid by the employee, or both.
Slide 3
Continued Legislative Outlook
 Mandatory 3% back-up withholdings
 Governmental Requirement to begin 3% withholding on
payments has been postponed under already signed
Stimulus package until December 31, 2011
 Mandatory use of IRS TIN matching System-Still under
consideration
 Increase of Back-Up Withholdings from 28% to 30% if the
federal tax cuts are allowed to expire.
 New P-Card Regulations proposed.
Slide 4
Who Gets a Form 1099?
•Is this the type of payee that gets a Form 1099?
– Some payees are exempt from Form 1099 reporting:
– EXEMPT PAYEES
•Is this the type of payment that gets a Form 1099?
– Taxable does not necessarily mean reportable
– There are over 20 Form 1099 return types. We will first
describe Form 1099 MISC (the form everyone in the room
has in common).
Slide 5
Form 1099-MISC:
•Box 1 Rents
•Box 2 Royalties
•Box 3 Other income
•Box 4 Federal Income Tax Withheld
•Box 6 Medical and health care payments
•Box 7 Non-employee compensation
•Box 9 Direct sales of consumer products
•Box 14 Gross proceeds paid to an attorney
•Boxes 16, 17, 18 for State Reporting
Slide 6
BOX 1: Rent
•Not just real estate rental: you are paying for the use of an
item
•Includes anything rented, such as machinery or equipment
rental
•Capital lease: you are purchasing the item – Not reportable
as rent
•Operating lease: reportable as rent
•Regular exemptions apply (corporation, tax- exempt,
government entity as well as $600 limit)
Slide 7
BOX 2: Royalties
•Report payments $10 and above
•You paid for the right to use, but the payee owns the property.
•Report surface royalties in Box 1
Slide 8
BOX 3: Other Income
•The payee didn’t do any work to earn this income
(otherwise it would be reported in Box 7 and subject to
self employment tax).
•If a settlement payment is reportable to a claimant,
report in box 3 (unless for ‘back pay,’ which is reported
on a Form W-2)
•Challenge: “awards” for services performed are Box 7
reportable.
Slide 9
BOX 4: Federal Income Tax Withheld
•Report any backup withheld amounts in this box
•Backup withholding rate is 28%
•The backup withheld amount is included in the “gross” amount in
the appropriate box(es).
– Example: If you paid John Doe $10,000 for rent,, and Mr. Doe failed to
provide his TIN, report $10,000 in box 1 and $2,800 in box 4 for the
backup withheld amount (28% of $10,000)
Slide 10
BOX 6: Medical and Health Care Payments
•NO CORPORATE EXEMPTION for this box but $600 limit
applies
•No reporting for things
•Report medical service payments: you paid to get someone
better...
Slide 11
BOX 6: Medical and Health Care Payments
•“Medical services provider”: Think in broad terms
– Include physical therapists, massage therapists,
psychotherapists, mental health counselors,
acupuncturists, employee assistance, executive
physicals, etc.
– If payee is a type that offers medical and health care
services, report ALL payments to that payee, regardless
of what each payment is for.
– Pre-employment physicals, drug screening, or expert
testimony performed by company that is a medical
services provider are reported in box 6.
Slide 12
BOX 7: Nonemployee Compensation
•Any payments for service (unless medical services, which go
in box 6)
•Not just payments to free-lancers and independent
contractors; any payment for service.
•Billed for parts and labor? Report total amount unless you
have the original receipts.
•Attorney payments when the attorney performed services for
you (No corporate exemption)
Slide 13
BOX 14: Gross Proceeds – Legal Services Payments
•Box 7 if attorney performed services for you
•Box 14 if attorney performed services for someone else,
but you paid (e.g. settlement)
– Even if you know how much opposing counsel is getting, report
in box 14 (as per “Middleman regs,” T.D. 9010)
•$600 threshold for both boxes
•No corporate exemption
•If attorney’s or law firm’s name is not on check, no
reporting required to attorney or law firm
Slide 14
Settlement Payments
Settlements paid to a claimant are reportable if such
payments are taxable to the claimant
Non-taxable settlements
 Personal injury or sickness
 Medical expense reimbursement
 Property damage
Taxable settlements
 Discrimination, libel, harassment, defamation
Slide 15
Settlement Reporting
• Non Taxable Settlement Reporting
– Claimant: No reporting
– Attorney: Report total in Box 14
• Taxable Settlement Reporting
– Claimant: Report payment in Box 3
– Attorney: Report total in Box 14
Slide 16
Form 1099-INT
Interest reporting
Section 6041: Interest paid for a late paid
invoice, late paid claim:
•
Report interest $600 and above
•
No penalty of perjury certification required
Slide 17
How To Get a TIN
If paying miscellaneous payments...
(Rents, commissions, nonemployee compensation,, etc.)
“the payee must furnish the payee’s [TIN]...either orally or in
writing. Except as provided in [response to first B- Notice
letter], the payee is not required to certify under penalties
of perjury that [TIN] is correct...”
(§31.3406(d) of backup withholding regulations)
Slide 18
About “LLC”
•IRS assumes these are partnerships...
•...unless LLC files an election form (Form 8832) with the IRS
requesting treatment as a corporation. LLCs rarely ever do
this.
•A Form W-9 with LLC and “corporation” can be relied on to
be treated as exempt…however this is usually wrong!
•Alternative: Tell LLC you need to see the reply from IRS to
their election request (Form 8832)
•Easier to always report an LLC
Slide 19
The “Eyeball Test” (1.6049-4(c)(1)(ii))
•Unambiguous indication that the entity is exempt, such as:
– Corporations (with exceptions)
• “Corp,” “Corporation,” “Inc.,” “Incorporated,” “P.C.”
– Tax-exempt entities
• “College,” “University,” “Church”
– Government entities
– IRA’s
Slide 20
The “Eyeball Test,” Part 2
Some terms that do NOT meet this test...
LP
LLP
LLC
Ltd. or Limited
Company
Co.
Enterprise
Slide 21
Even with the Heavy Adopters, Less than 2% of Spend is
Being Transacted Through a Purchasing Card
Value of Purchasing Card Transactions
% of Spend Purchased on a Purchasing Card
(in $millions)
$63.30
1.43%
$21.00
0.44%
0.07%
$2.25
1st Quartile
Median
3rd Quartile
1st Quartile
Median
3rd Quartile
Slide 22
Limiting Purchasing Card Transactions Allows for Tighter
Controls on Purchases
Limitation on Purchasing Card Transactions
(select all that apply)
Transaction volume (number or
frequency of transactions)
21%
Dollar limit by individual
77%
Dollar limit by department
28%
Dollar limit by purchase
Dollar limit by merchant
Other
72%
21%
28%
Slide 23
P-Card Reporting Final Regs
•IRS regs say, ‘Don’t have payee’s TIN? You must
backup withhold.’
•But when vendor was paid with payment card, backup
withholding is impossible to do.
•T.D. 9136 released as final regulations on JULY 13, 2004
– No exemption from backup withholding for payments
made with Payment Cards
– Payers can get vendors’ TINs from card organizations
– No backup withholding liability for initial use of TIN
provided by card organization
Slide 24
Proposed P-Card Regulations
• Under new section 6050W, any “payment settlement
entity” making payments will be required to process 1099
reporting to all appropriate payees.
• Only settlement entities who make the payments are
required under this proposal…not just a credit card
companies.
• Card holder will still be required to report other “non PCard” payments to the same vendors
• Proposed regulation applies if:
– Aggregate amount of payments exceeds $200,000
– Aggregate number of transactions exceeds 200.
Slide 25
Definitions
• Cardholder/payor defined:
“...a cardholder/payor is the person that agrees to make
payments through the payment card organization. Thus, in
the case of a payment card issued to an employee of a
person that agrees to make payments through the payment
card organization, the employer rather than the employee is
the cardholder/payor.” (§31.3406(g)- 1(f)(iv))
Slide 26
Examples of Reportable Services
(as per Rev. Proc. 2004-43)
•Hotels/Motels/Inns/Resorts (3501-3790)
•Landscaping Services (0780)
•Miscellaneous Publishing and Printing (2741)
•Airlines (3000- 3299)
•Taxicabs/Limousines (4121)
•Catering Services (5811)
•Counseling Services (7277)
Slide 27
TIN Matching Program
•IRS has defined User Profiles as follows:
– Principal – Someone who owns at least 5% of the
company
– Responsible Official – Individual who holds supervisory
position
– Authorized Agents – An individual contracted to transmit
Forms 1099 to the IRS on behalf of payer
– Delegated User – Any individual that will access TIN
Matching System on behalf of the payer
Slide 28
Nonresident Alien (NRA) Reporting Basics
• Do NOT get Forms W-9 from nonresident aliens
• Do NOT report at year-end on a Form 1099 to a
nonresident alien
• Get either a Form 8233 or one of the four types of Forms
W-8 from a nonresident alien
• Report at year-end on a Form 1042-S to a nonresident
alien
Slide 29
Nonresident Alien (NRA) Reporting Basics
• Reportable payments to nonresident aliens are subject to 30%
withholding...unless payee provides documentation for
exemption from, or lower rate of, withholding
• Main reasons for exemption from withholding:
– Tax treaty rate
– Foreign company already files U.S. tax return
• Only have to report “U.S.-Source Income”
– For services income, you look to WHERE the work was
performed
Slide 30
Summary of Sourcing rules
Personal services
Where performed
Dividends
Where incorporated
Interest
Residence of payer (where
incorporated)
Rentals
Where property is located
Royalties – patents, copyrights
Where property is used
Royalties – natural resources
Where property is located
Scholarships, fellowship grants
Residence of payee
Pensions
Where services were performed,
Rev. Proc. 2004-37
Promises not to compete, sign on
bonus
Place where right given up
Slide 31
Nonresident Alien (NRA) Reporting Basics
• Tax treaty rates shown in two tables in the back of IRS
Publication 515; also in Pub. 901, “Tax Treaties”
• NRA must have U.S. TIN to qualify for tax treaty rates (as of
January 1, 2001)
• Individual NRA: ITIN – Form W-7
• Business entity NRA: EIN – Form SS-4
• No corporate exemption for NRA reporting; no dollar
threshold
Slide 32
W-8
Foreign persons submit:
Form W-8 series
 Mandatory Withholding of 30% of payments
 No corporate exemption applies to W-8 reporting
 No dollar limit
Slide 33
Form 8233
Foreign individuals claiming treaty benefits or reduced
withholding on compensation use:
Form 8233, Exemption From Withholding on Compensation
for Independent (and Certain Dependent) Personal
Services of a Nonresident Alien Individual (Dec., 2001)
Must be updated annually
No corporate exemption or dollar limit
Slide 34
Tax Treaties
• Best source of information for A/P areas:
• IRS Publication 515, Withholding of Tax on Nonresident
Aliens and Foreign Entities
• Table 1 for non-compensation income such as royalties,
rents, pensions, dividends and interest and
• Table 2 for compensation
• Rates by income type in treaty and footnotes that caution
on treaty qualifications
• If you need more, you may need to consult an expert.
Slide 35
W-8BEN
W-8BEN – claims for treaty benefits on most types of
accounts payable income except for personal services,
claims for foreign exemption from backup withholding
and 1099 reporting
 No corporate exemption or dollar limit
 Use W-8BEN for royalties, rentals, and all other US sourced
income except personal services
 W-8BEN do not expire.
Slide 36
States NOT participating in Federal/State Combined
Reporting
Illinois
Oregon
Kentucky
Pennsylvania
Michigan
Rhode Island
New York
Vermont
Oklahoma
West Virginia
Slide 37
‘New Contractor’ Reporting
• Similar to “new hire” reporting (for reporting newly hired
employees), but for reporting new contractors instead
• Effort to catch “dead beat” parents who owe child support
• http://www.acf.hhs.gov/programs/cse/newhire/employer/contact
s/contact_map.htm
• Minnesota: www.mn-newhire.com
Slide 38
‘New Contractor’ Reporting (cont.)
Alabama
Alaska
California
Connecticut
Guam
Iowa
Maine
Massachusetts
 Minnesota (Required for State and
Local Governments-Private companies
have the option)
 Mississippi
 Nevada
 New Hampshire
 New Jersey
 Ohio
 Tennessee
Slide 39
Question and Answer
Sean C. Evans
DuCharme, McMillen & Associates, Inc.
Senior Tax Manager-Tax Advisory Service and Training
[email protected]
913-269-7912
Slide 40