Computers and technology have made things much easier in some aspects, and much harder in others. For the IRS, the art of matching people to their reported revenues has been made easier due to technology. This makes it even more important to have the correct information to report to the IRS.
Many businesses use vendors that require Forms 1099-MISC to be filed, and they do not even realize it. The person that comes in and cleans your office, the company that mows your lawn, or how about the electrician that fixed your lights? These vendors may require a Form 1099-MISC each year if you pay them $600 or more during the year. Of course, it is not as black and white as that, but those are some examples. Basically, a vendor who is not a corporation that provides a service to you requires a Form 1099-MISC. We can assist you in determining which vendors require Forms 1099-MISC and which do not. When in doubt, have them fill out a Form W-9 to go on record as saying they do not need to be issued a Form 1099-MISC. Most vendors have no problem filling out the form for you to keep on record, and it will help eliminate your company’s risk of IRS penalties.
Like I said, it is not as black and white as it may first appear, so let’s look at three other areas that cause some confusion. First, your landlord. If your business pays rent to a non-corporate landlord, even if they are a related party, you must provide the landlord (and the IRS) with a Form 1099-MISC. Second, your attorney. If your business pays for legal services, it must issue a Form 1099-MISC to the attorney, even if the law firm is a corporation. (Apparently even the IRS doesn’t trust attorneys.) Third, service vendors who are LLCs. Whether you have to issue them a Form 1099-MISC depends on whether they have elected to be taxed as a corporation or not, and the best way for you to find that out is to have them fill out a Form W-9. If they are taxed as a partnership, you need to issue them a Form 1099-MISC.
The IRS has been working towards increasing the amount of forms required for reporting income, so they can ensure that everyone is reporting all of their income. The stricter requirements on Forms 1099-MISC and W-9 are another way they are trying to increase the likelihood of everyone reporting all their income they have for a year. If you do not request the information, and therefore do not have it when filing your Forms 1099-MISC at year end, the IRS may send you a notice requiring you to withhold 28% from payments to the recipient until you can furnish the IRS with the correct information. You may also be subject to penalties for not filing Forms 1099-MISC. In order to avoid penalties for yourself and the withholding for your vendors, have them fill out the Form W-9 which should be updated on a yearly basis to be in compliance with the IRS.
If you are concerned about your level of compliance with the IRS requirements on reporting payments to your vendors, please contact us at Willis & Jurasek so we can help you navigate this increasingly risky area.