Every January, businesses must report payments of income such as dividends, interest and non-employee compensation with IRS form 1099. The 2012 tax filing season is the first year that businesses must file a form 1099-K. The addition of a new form 1099 among the IRS forms has caused considerable confusion. The focus of concern surrounds IRS forms 1099-MISC and the new form 1099-K.
What is a 1099?
IRS forms 1099 is a series of forms that are used to report income other than wages. For example, form 1099-INT is used to report interest earned and form 1099-DIV is used to report dividends earned. Form 1099-MISC instructions are as follows: use to report payments to independent contractors when payments exceed $600 during the year. Businesses must issue 1099-MISC forms to their subcontractors and in turn may receive 1099-MISC forms from their clients.
When preparing 1099 forms for 2011, businesses are required to issue a 1099-MISC to:
- Attorneys or law firms no matter the business organization type
- Corporations for certain kinds of activities
Robert D. Flach clarified the 1099 reporting requirements in his January 13, 2012 post for WanderingTaxPro titled, “To 1099 Or Not To 1099 – That Is The Question!” Regarding payments to corporations, Flach said, “Generally you do not have to issue a Form 1099-MISC for nonemployee compensation paid to a corporation. Payments to corporations are reported only if they are for medical, health care, legal or fishing activities.”
Businesses that accept credit and debit card payments from customers or who process transactions through a third party service such as PayPal, will be receiving a new form that reports the total of payments processed for the year. January of 2012 is the first filing season where payment settlement entities including credit card processors such as banks, Visa and MasterCard, and online payment processors such as PayPal, will be required to issue form 1099-K to report payments processed for merchants.
Only businesses that have generated at least $20,000 in payments and 200 transactions will receive a 1099-K from their payment processors. George G. Jones and Mark A. Luscombe outlined 2011 reporting requirements in their January 1, 2012 article for Accounting Today titled, “What’s new for the 2011 filing season?”
Jones and Luscombe explained, “The reports will generally be made of gross payments, so adjustments for fees, chargebacks and returns may have to be explained to account for any differences from the amounts reported on the Form 1099-K. Your clients will probably want to start keeping track of these adjustments in separate accounts so that they can verify the gross payment information reported on the Form 1099-K and trace the adjustments.”
Where Confusion Lies
Because businesses are required to report payments made to non-employees on form 1099-MISC, and payment processors will report the proceeds of transactions paid electronically or by credit and debit cards on form 1099-K, there is some concern that the duplicate reporting of income will result.
Form 1099-MISC is only supposed to include payments made by cash or check but a business owner who receives a 1099-MISC form cannot count on clients to prepare the form correctly. If you discover that your 1099-MISC includes payments other than by cash, you can request that your client prepare a corrected copy.
Recordkeeping and Reporting
All income received during the year must be reported as gross income on the year’s tax return. The IRS will expect that gross income reported is at least as much as the total of all 1099-MISC and 1099-Ks. Any necessary adjustments to total income can be made as long as the taxpayer has the records to back them up. For this reason, and to reduce the number of 1099-MISC forms that must be prepared for subcontractors, it’s a good idea for businesses to track cash transactions separately for both income and expenses.
Separate accounts for sales tax, returns and charge-backs are a good idea, too, so that the business can justify deducting them from income on the tax return. Brent Hunsberger captured the confusion in a nutshell in his January 14, 2012 post for OregonLive.com titled, “For small businesses and taxes, it’s the year of the 1099s.”
“If you issue a 1099-MISC to a vendor or subcontractor, you’re supposed to exclude any amounts paid by debit, gift or credit card or PayPal. That’s to avoid duplicate reporting to the IRS. Payments by cash or check, however, still must be included on those 1099s. That’s going to complicate bookkeeping for coffee shops, restaurants and contractors. It could actually lessen paperwork for those who make all vendor payments electronically,” Hunsberger said.
Merchants and businesses can expect to receive their 1099-K forms by January 31, 2012.