A Low Filing Threshhold
As an independent writer, illustrator, author, editor or researcher filing a Schedule C as a sole proprietor, you are likely to receive one or more Form 1099-MISC’s from your customers/clients (those that paid you $600 or more during 2012) shortly after the year-end. You also will need to prepare and issue this form to any subcontractor (if they are unincorporated) you paid $600 or more during the year for services received and rents paid for the use of business property. This form is also used to report royalties paid to authors of $10 or more (see below). Copies of the form are sent to the IRS and will be matched to the recipient’s tax return to check reporting compliance. If your gross receipts reported on Schedule C are less than the total amount of 1099-MISC income reported to the IRS, you can expect a letter of inquiry.
Box 2 of the form is used to report royalty payments from intangible property such as patents, copyrights, trade names, and trademarks. The reporting threshhold here is $10 or more. Publishers are required to report gross royalties (before reduction for fees, commissions, or expenses) paid directly to an author or literary agent, unless the agent is a corporation. The literary agent (whether or not a corporation) that receives the royalty payment on behalf of the author must report the gross amount of royalty payments to the author on Form 1099-MISC (whether or not the publisher reported the payment to the agent on its Form 1099-MISC).
Your Reporting Requirements
You are required to file Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid at least $600 in the course of your trade or business. You report the amount paid in box 7 of the form. Box 7 is labeled “Nonemployee Compensation.” According to the IRS, if the following four conditions are met, you must report a payment as nonemployee compensation:
- You made the payment to someone who is not your employee;
- You made the payment for services in the course of your trade or business;
- You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
- You made payments to the payee of at least $600 during the year.
At year-end, it is your responsibility, even if you hire your accounting firm to prepare Form 1099-MISC, to provide the information needed, from your books and records, to do that. You will need the name, address and tax-identifying number (usually the person’s Social Security Number [SSN]) of the individual and the amount they were paid during the year. The forms must be distributed to payees by January 31, 2013 for payments made during 2012. You have until the last day of February to file them with the IRS (or March 31 if filing electronically). If you need extra time to file these, file Form 8809. All of your 1099’s going to the IRS will be summarized on Form 1096, Annual Summary and Transmittal of U.S. Information Returns. There is a penalty for each Form 1099-MISC filed late. Penalties are not only expensive, they’re not deductible either.
As a business, you should have vendor files. Independent contractors that you hire should have a folder as a vendor. Before you engage or make a payment to an independent contractor, you should make sure they have supplied you with a completed Form W-9 – Request for Taxpayer Identification Number and Certification. You should supply this form at the beginning of the relationship and indicate that you must receive it back before services begin and also indicate that no payments will be made until it is received (if you have a contract, this provision should be included). If the subcontractor refuses to give you a completed W-9, you may want to select another vendor (for various reasons). View and print Form W-9.
In the subcontractor vendor file, you should have the original completed W-9, a business card or letterhead from the vendor, any advertisements or brochures from the vendor and a copy of the contract (if used). You may need to prove that the payments were to a subcontractor (and not a disguised employee) and these documents will help greatly in that regard. This employee/independent contractor issue will be covered in a future blog.
Remember, all business income needs to be reported on your tax return whether you receive a Form 1099-MISC or not. It’s amazing how one IRS audit will “flush out” payments made to others. I know of one case where the taxpayer, as part of the examination, had to prepare approximately 100 Form 1099-MISC’s for the current year and the same amount for two prior years. Now, those 100 forms per year were put on the IRS data base and into each taxpayer’s record for each year. Then, all the income for each year, including the added 1099 income, was compared to their original return to see if the 1099 income had been included. One possible clue that there might be an income reporting problem for some of the 100 recipients was the fact that they were fighting the taxpayer’s representative before giving up their Social Security Numbers.
You’ve Still Got Time
That’s right. You’ve still got time in 2012 to get this business requirement in top-notch order. Of course, the preferred method of documenting independent contractor services was discussed above. However, it’s not too late to secure those Form W-9’s from this year’s independent contractors that you have or will pay $600 or more. By reviewing copies of invoices, credit card statements, and your check register, you will be able to identify the “600 and over” club. Be ready to hear some moanin’ and groanin’ from those that like to stay under the radar.