The IRS is concerned that payers are failing to backup withhold on 1099 reportable payment without Taxpayer Identification Numbers (TIN). The National Research Program (NRP) did an audit and found the following will need a sharper audit focus:
Backup Withholding Triggers
- Have the payees TIN at the time you make the payment. That means you do not have until January 31st to solicit them. Ideally, you need to gather this information when you first hire the employee or contractor.
- Assure that the TIN is certified.
- Make sure the payee responds to your B Notice letters and that the bank sends payer’s interest and dividends notices.
- If the payee crosses out the perjury section of the W-9 where it tells the payer to back up withhold on interest and payments, it will likely garner the attention of the IRS.
Guidelines for Reporting
Federal taxes withheld from payments must be deposited with the U.S. Treasury through the Electronic Federal Tax Payment System (EFTPS) and according to your organization’s tax schedule.
In 2015 you will be a monthly schedule depositor if the total tax on your TY 2013 Form 945 (form 945 filed in 2014 on line 3) was $50,000 or less. Deposits become due by the 15th of the month following the month in which the liability arose. If you accumulate a $100,000 liability on any day during the calendar year, your deposit schedule will be changed on the next day to semi-weekly for the remainder of the year and for the following year.
If the total tax reported on Form 945 for TY 2013 exceeds $50,000, you will become a semi-weekly depositor. Liabilities that arise on Wednesday, Thursday, or Friday must be deposited by the following Wednesday. Liabilities that arise on Saturday, Sunday, Monday, and Tuesday must be deposited by the following Friday.
Worker Misclassification
Independent Contractors must be reported in the correct classification and must qualify as independent in accordance to the IRS guidelines and not simply on the decision of the payer or payee.
Box 7 on Form 1099-MISC
It’s important that box 7 is filled out correctly to avoid problems with the IRS. Please be aware that:
Amounts reported in Box as non-employee compensation are subject to both income and self-employment tax.
The IRS will be looking for self-employment tax payments on the payee’s return. If they are not found, the IRS will contact the payees with notices of tax due.
Forms 1099-MISC reporting amounts in Box 7 that have TINs on them may be a red flag for work authorization violations.
Non-employee compensation is income from self-employment. Self-employment is employment meaning work authorization is likely to be necessary. Its best to not address this in an accounts payable department but rather it should be reviewed somewhere in your organization.
For help making sure 1099’s are correct and to avoid IRS audits, contact us.