Form 1099 – Overview

1. Form 1099 – Overview Robert J. Kiggins May 15, 2013

2. What We Will Cover • IRS Information Reporting Procedures • Purposes of Form 1099 Reporting • Due Dates for Form 1099 Series • Penalties for Noncompliance • Consequences of Errors with Inaccurate Names and TINS • Reasonable Cause

3. IRS Information Reporting Procedures • What is an Information Return? • An information return is a tax document businesses are required to file to report certain business transactions to the Internal Revenue Service (IRS). • The requirement to file Information Returns is mandated by the Internal Revenue Service and associated regulations. • Who must file Information Returns? • Any person, including a corporation, partnership, individual, estate, and trust. • Who make reportable transactions during the calendar year • Must file information returns to report those transactions to the IRS.

4. IRS Information Reporting Procedures (Cont’d) • Persons required to file Information Returns to the IRS must also furnish statements to the recipients (Payees) of the income. • In fact the order is • First furnish statements to the recipients. • Second file the information reports to the IRS • Filers who have 250 or more returns must file these returns with the IRS electronically.

5. Purposes of Form 1099 Reporting • IRS Form 1099 has many purposes for reporting income and there is more than one Form 1099. • 1099-A is used to report all amounts owed which are the result of the recovery or abandonment of property that is security for a debt for which you are the creditor. • 1099-B is used to report all amounts from brokerage and barter exchange transactions.

6. Purposes of Form 1099 Reporting – Cont’d • 1099-DIV is used to report all dividends and capital gains of $10.00 or more. • 1099-G is used for government payments. • $10.00 or more for unemployment compensation and state and local income tax refunds. • $600.00 or more for taxable grants and discharge of indebtedness in bankruptcy. • 1099-INT is used for reporting all interest income in excess of $10.00.

7. Purposes of Form 1099 Reporting – Cont’d • 1099-MISC is used to report miscellaneous income. • Royalty payments exceeding $10.00. • Rent, prizes or awards in excess of $600.00. • Payments to any non-employee of a business, i.e. contract labor, subcontractors, directors in excess of $600.00. • "Golden Parachute" payments made in excess of $600.00 • 1099-R is used to report all amounts paid from retirement, profit sharing, IRAs, SEPs or 401(K) and 403(C) programs. • 1099-S is used to report all gross receipts from the sale or exchange of real estate

8. Due Dates (General Rules) • As a General Rule, Form 1099’s must Be Sent to the Payees by January 31 • Consult Handout Materials for Specifics • Manually Filed Form 1099’s Must be Sent to the IRS by February 28 • Electronically Filed Form 1099’s Must be Transmitted to the IRS by March 31

9. Penalties - Failure To File Correct Information Returns with the IRS by the Due Date (Section 6721) • If you fail to file a correct information return with the IRS by the due date and you cannot show reasonable cause, you may be subject to a penalty. • The penalty applies if • you fail to file timely, • you fail to include all information required to be shown on a return, • or you include incorrect information on a return.

10. Penalties - Failure To File Correct Information Returns with the IRS by the Due Date (Section 6721) – Cont’d • The penalty also applies if • you file on paper when you were required to file electronically, • you report an incorrect TINor fail to report a TIN, or • you fail to file paper forms that are machine readable. • The amount of the penalty is based on when you file the correct information return.

11. Penalties - Failure To File Correct Information Returns with the IRS by the Due Date (Section 6721) - Cont’d • The penalty is: • $30 (was $15 before Small Business Jobs Act of 2010) per information return if you correctly file within 30 days (by March 30 if the due date is February 28); • maximum penalty $250,000 per year • ($75,000 for small businesses, defined below). • $60 (was $30) per information return if you correctly file more than 30 days after the due date but by August 1; • maximum penalty $500,000 per year • ($200,000 for small businesses).

12. Penalties - Failure To File Correct Information Returns with IRS by the Due Date (Section 6721) - Cont’d • $100 (was $50) per information return if you file after August 1 or you do not file required information returns; • maximum penalty $1,500,000 per year • ($500,000 for small businesses). • Small businesses—lower maximum penalties. You are a small business if your average annual gross receipts for the 3 most recent tax years (or for the period you were in existence, if shorter) ending before the calendar year in which the information returns were due are $5 million or less. • This same penalty scheme applies to a failure to report to a payee

13. Penalties - Failure To File Correct Information Returns with IRS by the Due Date (Section 6721) - Cont’d • Intentional disregard of payee statement requirements. If any failure to provide a correct payee statement is due to intentional disregard of the requirements to furnish a correct payee statement, the penalty is at least $250 (old minimum was $100) per payee statement with no maximum penalty

14. Penalties - Failure To Furnish Correct Payee Statements (Section 6722) • If you fail to provide correct payee statements and you cannot show reasonable cause, you may be subject to a penalty. • The penalty applies if • you fail to provide the statement by January 31 (February 15 for Forms 1099-B, 1099-S, and 1099-MISC (boxes 8 and 14 only)),

15. Penalties - Failure To Furnish Correct Payee Statements (Section 6722) - • you fail to include all information required to be shown on the statement, or • you include incorrect information on the statement. • "Payee statement" has the same meaning as "statement to recipient” • The amount of the penalty is based on when you furnish the correct payee statement.

16. Penalties - Failure To Furnish Correct Payee Statements (Section 6722) • It is a separate penalty, and is applied in the same manner as the penalty for failure to file correct information returns by the due date (Section 6721)

17. Penalties - Failure To Furnish Correct Payee Statements (Section 6722) • Exception. An inconsequential error or omission is not considered a failure to include correct information. • An inconsequential error or omission cannot reasonably be expected to prevent or hinder the payee from timely receiving correct information and reporting it on his or her income tax return or from otherwise putting the statement to its intended use.

18. Penalties - Failure To Furnish Correct Payee Statements (Section 6722) • Errors and omissions that are never inconsequential are those relating to • a dollar amount, • a significant item in a payee's address, • the appropriate form for the information provided (that is, whether the form is an acceptable substitute for the official IRS form), and • whether the statement was furnished in person or by "statement mailing," when required.

19. Penalties - Failure To Furnish Correct Payee Statements (Section 6722) • Intentional disregard of payee statement requirements. If any failure to provide a correct payee statement is due to intentional disregard of the requirements to furnish a correct payee statement, the penalty is at least $250 (old minimum was $100) per payee statement with no maximum penalty.

20. Reasonable Cause • Penalties Don’t Apply where Reasonable Cause under Treas. Reg. § 301.6724-1 Can Be Shown: • Significant mitigating factors + Filer Acting in a Responsible Manner = Reasonable Cause • Significant Mitigation Factors • (1) The fact that prior to the failure the filer was never required to file the particular type of return or furnish the particular type of statement with respect to which the failure occurred, or • (2) The fact that the filer has an established history of complying with the information reporting requirement with respect to which the failure occurred. In determining whether the filer has such an established history, significant consideration is given to— • (i) Whether the filer has incurred any penalty under in prior years for the failure (or under parallel provisions of prior law), and • (ii) If the filer has incurred any such penalty in prior years, the extent of the filer's success in lessening its error rate from year to year. • A filer may treat as a penalty not incurred any penalty that was self-assessed under section 6724(c)(3) and any penalty under section 6676(b) that was self-assessed under section 6676(d), prior to amendment or repeal by the Omnibus Budget Reconciliation Act of 1989.

21. Reasonable Cause • Responsible manner—Acting in a responsible manner generally means— • (i) That the filer exercised reasonable care, which is that standard of care that a reasonably prudent person would use under the circumstances in the course of its business in determining its filing obligations and in handling account information such as account numbers and balances, and • (ii) That the filer undertook significant steps to avoid or mitigate the failure, including, where applicable— • (A) Requesting appropriate extensions of time to file, when practicable, in order to avoid the failure, • (B) Attempting to prevent an impediment or a failure, if it was foreseeable, • (C) Acting to remove an impediment or the cause of a failure, once it occurred, and • (D) Rectifying the failure as promptly as possible once the impediment was removed or the failure was discovered.

22. Reasonable Cause • Events beyond the filer's control. In order to establish reasonable cause under this standard, the filer must be meet the Responsible manner test set forth above and must show that the failure was due to events beyond the filer's control. • Events which are generally considered beyond the filer's control include but are not limited to— • (i) The unavailability of the relevant business records • fire or other casualty that damages or impairs the filer's relevant business records or the filer's system for processing and filing such record • regulatory change that has a direct impact upon data processing and that is made so close to the time that the return or payee statement is required that, the change cannot be complied with • unavoidable absence (e.g., due to death or serious illness) of the person with the sole responsibility for filing a return or furnishing a payee statement • (ii) An undue economic hardship relating to filing on magnetic media (as described in paragraph (c)(3) of the Reg), • (iii) Certain actions of the Internal Revenue Service • failure was due to the filer's reasonable reliance on erroneous written information from the Internal Revenue Service. • Reasonable reliance means that the filer relied in good faith on the information. • The filer shall not be considered to have relied in good faith if the Internal Revenue Service was not aware of all the facts when it provided the information to the filer. • In order to substantiate reasonable cause under this paragraph (c)(4), the filer must provide a copy of the written information provided by the Internal Revenue Service and, if applicable, the filer's written request for the information.

23. Reasonable Cause • (iv) Certain actions of the filer’s agent • The filer exercised reasonable business judgment in contracting with the agent to file timely correct returns or furnish timely correct payee statements with respect to which the failure occurred. • This includes contracting with the agent and providing the proper information sufficiently in advance of the due date of the return or statement to permit timely filing of correct returns or timely furnishing of correct payee statements; and • The agent satisfied the reasonable cause criteria for mitigating circumstances or one of the reasonable cause criteria • (v) Certain actions of the payee or any other person providing necessary information with respect to the return or payee statement (as described in paragraph (c)(6) of the Reg). • (i) That the failure resulted from the failure of the payee, or any other person required to provide information necessary for the filer to comply with the information reporting requirements (“any other person”), to provide information to the filer, or • (ii) That the failure resulted from incorrect information provided by the payee (or any other person) upon which information the filer relied in good faith. • To substantiate reasonable cause the filer must provide documentary evidence upon request of the Internal Revenue Service showing that the failure was attributable to the payee (or any other person). • There are special rules relating to the availability of a waiver where the filer's failure relates to a taxpayer identification number (TIN), and the failure is attributable to actions of the payee described above

24. Employee or Independent Contractor? Robert J. Kiggins

25. General Test • Generally an employee relationship exists when the person for whom services are performed has • the right to control and direct the individual who performs ' the services, • not only as to the result to be accomplished by the Work • but also as to the details and means by which that result is accomplished. • That is an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. • In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. • The right to discharge is also an important factor indicating that the person possessing that right is an employer. • Other factors characteristic of an employer, but not -necessarily present in every case, are • the fur­nishing 'Of tools and • the furnishing of a place to work • to the individual who performs the services.

26. General Test • In general, if an, individual is subject to the control or direc­tion of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. • An individual performing services as an independent contractor' is not as to such services an employee under the usual common law rules. • Individuals such as physicians, lawyers, dentists, veterinarians, construction contractors, public stenographers, and auctioneers, engaged in the pursuit of an independent trade, business, or profession, in which they offer their services to the public, are independent Contractors and not employees.

27. Revenue Ruling 87-41: The Twenty Factors • To help determine whether a worker is an employee under the common law rules, the IRSidentified 20 factors that • may indicate whether the employer can exercise enough control to establish an employer-employee relationship. • These factors, set forth in Revenue Ruling 87-41, were based on the circumstances that the courts identified and relied upon to decide whether an employment relationship existed. • Not all the factors must be present to find an employee/employment relationship, • but the factors are guides to use • to assess the likelihood as to whether an individual is an employee or an independent contractor. • (1) Instructions. An employee must comply with instructions about when, where and how to work. The control factor is present if the employer has the right to require compliance with the instructions.

28. Revenue Ruling 87-41: The Twenty Factors • (2) Training. An employee receives on-going training from, or at the direction of, the employer. • Independent contractors use their own methods and receive no training from the purchasers of their services. • (3) Integration. An employee’s services are integrated into the business operations because the services are important to the business. This shows that the worker is subject to direction and control of the employer. • (4) Services rendered personally. If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees, an independent contractor may assign the work to others.  • (5) Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee. An independent contractor hires, supervises and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

29. Revenue Ruling 87-41: The Twenty Factors • (6) Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists. The IRS has found that a continuing relationship may exist where work is performed at frequently recurring intervals, even if the intervals are irregular.  • (7) Set hours of work. A worker who has set hours of work established by an employer is generally an employee. • An independent contractor sets his/her own schedule. • (8) Full time required. An employee normally works full time for an employer. • An independent contractor is free to work when and for whom he or she chooses. • (9) Work done on premises. Work performed on the premises of the employer for whom the services are performed suggests employer control, and therefore, the worker may be an employee. • Independent Contractor may perform the work wherever they desire as long as the contract requirements are performed. • (10) Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee.  Independent Contractor performs the work in whatever order or sequence they may desire.

30. Revenue Ruling 87-41: The Twenty Factors • (11) Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicates a degree of control by the employer. • (12) Payments by hour, week or month. Payments by the hour, week or month generally point to an employer-employee relationship. •  (13) Payment of expenses. If the employer ordinarily pays the worker’s business and/or travel expenses, the worker is ordinarily an employee. • (14) Furnishing of tools and materials. If the employer furnishes significant tools, materials and other equipment by an employer, the worker is generally an employee. • (15) Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.

31. Revenue Ruling 87-41: The Twenty Factors • (16) Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor.  Employees are typically paid for their time and labor and have no liability for business expenses. •  (17) Working for more than one firm at a time.If a worker performs services for a multiple of unrelated firms at the same time, the worker may be an independent contractor. • (18) Making services available to the general public. If a worker makes his or her services available to the general public on a regular and consistent basis, the worker may be an independent contractor. • (19) Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee. • (20) Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.

32. Three Categories of Control Factors • Over the years, the Internal Revenue Service recognized changes in business practices and therefore created three categories of factors to assess the degree of control and independence.  • These factors are to be used in conjunction with the 20 Factors. • (1) Behavioral Control  - Includes the type of instructions the business gives to the worker, such as • when and where to do the work, and • the training the business provides to the worker. • The key consideration is whether the business has retained the right to control the details of the worker’s performance or has relinquished that right • (2) Financial Control - Address the business’s right to control the business aspects of the worker’s job. • (3) Relationship Of Parties - The nature of the relationship may be evidenced by: • a written contract; • the benefits the business provides to an employee, such as paid vacation and  health coverage;  •  the permanency of the position; and • the extent to which the services performed are a key aspect of the regular business of the company.

33. Indicator Zones • The ultimate test is whether the principal has the “right to direct” and control the individual in question. • Case law tends to look at six indicator zones to answer this test: • Details of Work Performance • Expenses of Work Performed • Compensation for Work • Duration of Work Performance • Structure of Work Position • Location of Work Performance

34. 1. Details of Work Performance • Right to Control • Employee – activities and time are surrendered to the control of the employer • Put differently – the employer has the right to say when, where, and how the worker is to work • Independent contractor – agreement to accomplish results or to use skill and care in accomplishing results • Training a Worker • Where a worker is required by the person for whom services are perfomed to be trained or required to work with an experienced worker this is indicative of an employee relationship • Set Hours of Work and Requirement to Work Full Time • These are factors indicative of employee status

35. 1. Details of Work Performance • Order or Sequence Set – Tends to Show Employee Status • Where the worker is required to follow the established routines and schedules of the person or persons for whom the services are performed – this indicates employee status • The key fact to consider is whether the business retains the right to direct and control the worker, regardless of whether the business actually exercises that right. • Required Written or Oral Reports – Tends to Show Employee Status • when the reporting system "measures compliance with performance standards concerning the details of how the work is performed, the system and its enforcement are evidence of control over the worker's behavior

36. 1. Details of Work Performance • Skill • Less skilled more likely to be employees • By contrast, highly trained professional • Almost impossible to give such a person detailed instructions • In such a case the key point whether the workers are engaged in the pursuit of an independent' trade, business, or profession in which they offer their services to the public. • If so – they are likely independent contractors • If not – they are likely employees • Labels • Although the label placed on a relationship is irrelevant if it does not represent its true substance, it can be helpful in deciphering the parties' intent.

37. 2. Expenses of Work Performance • Payment of business or/or Travel Expenses – indicia of employee status • Note: clients of lawyers and accountants pay their travel expenses – does not maker them employees • Unreimbursed expenses – independent contractors more likely to have these • IRS does recognized that both employees and independent contractors have reimbursed expenses • It is more useful to IC status that worker pays fixed on going costs that are paid regardless of whether work is being performed • Furnishing of Tools and Materials to Worker – indicia of employee status • The more valuable the items furnished the more importance that is placed on this factor • Relatively minor items furnished by worker do not typically support independent contractor status • Significant Investment in Business – indicia of IC status • E.g. - Maintaining an office – c.f. but a home office would be scrutinized • Costly equipment – e.g. computer systems

38. 2. Expenses of Work Performance • Licenses and Fees • IC’s obtain and pay for licenses (business, trade, construction permits, and professional licenses) • IC’s also pay estimated taxes and self-employment taxes • W-2 is only evidence of employee status – it’s not conclusive • Conversely the same applies as to 1099 – it’s only evidence of IC status

39. 3. Compensation for Work • Payment by the hour week or month • Generally indicates EE status • C.F. Payment by the job or on a commission generally indicates IC status • A minimum salary or a non-refundable draw is indicative of EE status • Realization of a Profit or a Loss • Worker subject to real risk of economic loss due to significant investments or expense liability – IC • Risk of non-payment of earned amounts – IC • Is the worker making the decisions that affect the worker’s bottom line – if so IC • Insurance • Worker’s comp, fidelity bond, medical/dental/disability – Employee • IC’s provide own insurance in these areas • Benefits • Tax qualified plan, annuity or cafeteria plan – can only be provided to employees • Sick pay, paid vacations, bonuses, travel and business expense reimbursement, advances or drawing account – indicate employee status

40. 4. Duration of Work Performance • Right of Discharge • Employee – can be fired • IC – generally can’t be fired as long as performs pursuant to contract • Right of Worker to Terminate = neutral • Length of Relationship • In general, the longer the term of the relationship the more likely that employee status will be found

41. 5. Structure of Work Position • Integration into the Business • The more the success of the business is dependent upon the success of the worker the more likely that EE status results • However, this is likely not a determinative factor • In fact, it is likely less a factor now than in the past • Services rendered personally • If worker can’t delegate performance – some evidence that worker is EE • Many courts don’t consider this a helpful factor • Hiring, Supervising and Paying Assistants • This is some evidence of IC status • Generally won’t be determinative • Working for more than one firm at a Time • Some evidence of IC status • Not determinative – e.g especially if the firms are somewhat related

42. 5. Structure of Work Position • Making service available to General Public • A worker who consistently makes his or her service available to the general public – strong evidence of IC status • This might be done by advertising, use of business cards, a web site, or other materials to make the public aware of availability • Status of Principal • If principal is in business – evidence that worker is EE • Fits into a consideration under “relationship” of the parties • Intent • Status of worker (IC or EE) intended by parties is a factor • However, just calling a worker an EE or IC is not determinative

43. 5. Structure of Work Position • Industry Custom • IE whether workers of the same type are generally treated as IC’s or EE’s by the industry • This will generally not be afforded much weight by the IRS • However, there is case law that does use industry custom to decide

44. 5. Structure of Work Position • State Law Characterization • It is not determinative whether state law characterizes a worker (e.g. for unemployment or workers comp) as an IC or an EE • In fact, IRS Training Course says state law determinations should be disregarded • Rationale – different standards apply • Usually under broader or different definitions of “employee” than exist under common law

45. 5. Structure of Work Position • Incorporation – Worker sets up Corporate Shell • This will do the trick of making the corporation an IC • However, the worker in turn will be an employee of his corporation • It also means the workers corporation will have to do payroll withholding, provide worker’s compensation, provide disability and generally do what a payroll office function has to do • Location of work performance • If worker performs on premises furnished by person hiring – some evidence of EE • CF – if worker performs off premises – some evidence of IC • These days – remote home office workers are becoming more common – many are EE’s • Probably more the key is if the worker has to work on premises of hirer, at set hours, and on set dats

46. Backup Withholding Robert J. Kiggins

47. Backup Withholding What is Backup Withholding? • Income tax may have to be withheld at a flat rate of 28% on the following types of income: • Interest, • Dividends, • Rents • Royalties, • Commissions and fees paid to independent contractors, • Payments from brokers on stock and bond transactions.

48. Backup Withholding When does the IRS require Backup Withholding? • The payee fails to furnish his or her taxpayer identification number (TIN) to you. • For interest, dividend, and broker and barter exchange accounts the payee fails to certify, under penalties of perjury, that the TIN provided is correct,

49. Backup Withholding When does the IRS require Backup Withholding? - Continued • The IRS notifies you to impose backup withholding because the payee furnished an incorrect TIN, • For interest and dividend accounts or instruments, you are notified that the payee is subject to backup withholding or • For interest and dividend accounts the payee fails to certify to you, under penalties of perjury, that he or she is not subject to backup withholding

50. Backup WithholdingPenalties • If you do not collect and pay over backup withholding from affected payees as required, you may become liable for any uncollected amount!!!!