Many people still do not fully understand the new 1099 law i.e. the new IRS requirements on Forms 1099. Forms 1099 are used by the IRS to track payments made by businesses to vendors. The new IRS requirement is that businesses declare any payment made to vendors (individuals or business entities) exceeding $600 in any year. If such payments have been made, you must file a Form 1099-Miscellaneous by January or February of the following year so that taxes can be collected from the vendor. This is what the IRS is doing to reduce the tax gap – the difference between the amount collected by the IRS and the amount actually owed in taxes that currently stands at about $450 billion a year.
If you run a business, you would inevitably pay vendors for products or services used by your business. When you file your taxes your tax form includes two self-incriminating questions on such payments – ““Did your business make any payments that would require filing Form(s) 1099?” and “If yes, did your business file or will it file Form(s) 1099?” Once you declare “yes” (which is most likely the case), you would have to issue a 1099 to the vendor and submit the same to the IRS.
In order to issue a 1099 you have to obtain the vendor’s Tax Identification Number. This is done by issuing a Form W-9 Request for Taxpayer Identification to the vendor.
The new law states the penalties for non-compliance. Firstly, if you do not submit a Form 1099 to the IRS, you will be fined $50 per unfiled form. But this amount increases to the greater of $100 per Form or 10% of the total amount that should have been reported if the IRS believes the failure was intentional. If you stated “yes” in those self-incriminating questions in your tax return and did not submit Form 1099, then it is considered intentional. Worse still is if you stated “no” to those questions and it is later proven that you were required to file Form 1099, you would be guilty of both intentionally violating the new 1099 law and committing perjury on your tax return.
Another penalty is the amount vendors have to pay if they do not provide you with their Tax Identification Number. You as the payer are to deduct 28% from your payment to them and remit it to the IRS. This 28% is called the “backup withholding”. On your part, if you fail to collect and remit the 28% backup withholdings, the penalty carries the same weight as the payroll taxes and is equal to the 28% tax that should have been withheld.
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Law Offices of Darrin T. Mish, P.A.: Tax Attorney