By Molly Van Kampen, CPP
As summer comes to a close and we near year end, it’s a good time for 1099 filers to start making some preparations. It may seem early, but advanced preparation provides the best protection. Understanding proper vendor Tax Identification Number (TIN) collection and verification, and proper payment classification, can mitigate penalties and help make January a whole lot easier.
Penalties and interest are an unnecessary expense. Returns that are filed with incorrect information, incorrect or missing TIN, or are filed late are subject to penalties of up to $270 per return with a maximum $3,339,000 penalty per year ($1,113,000 for small businesses).
There are a few key items that you can do now in preparation that, with on-going effort, will make year-end reporting less troublesome and ensure you are protecting your business from penalties and interest due to poor vendor record information.
Know your recipients.
This starts with the critical component of collecting the recipient’s TIN. The individuals and companies that you have made payments to throughout the year may not be as familiar as close associates or friends. You certainly do not need to remember their birthday or their working anniversary, but you are responsible for ensuring that you have the proper information to comply with the IRS reporting requirements. In almost all circumstances, the best practice of collecting TIN information is with the W-9 (Request for Taxpayer Identification Number and Certification) or an IRS appropriate substitute collection process.
When a recipient provides a W-9, or appropriate substitute, they will have signed a perjury statement, certifying that:
- The payee’s TIN is correct
- The payee is not subject to backup withholding due to failure to report interest and dividend income
- The payee is a U.S. person
- The FATCA code entered on the form (if any) indicating that the payee is exempt from FATCA reporting is correct
Recipients that do not provide a TIN, or a TIN which is not reasonably believed to be valid, are subject to back-up withholding of 24%. Back-up withholding needs to be remitted (generally via EFTPS) and reported on the 1099-MISC, box 4, and on the 945 (Annual Return of Withheld Federal Income Tax).
In addition to requesting a W-9 or substitute, due diligence requires that you review the information provided to ensure that accurate information is being collected. There are a few simple items to review in order to ensure that the information provided is in fact probably or possibly accurate.
Format of the TIN can be an easy identifier of accuracy:
An appropriate TIN for a 1099 recipient can be one of few identification numbers, all of which are 9 digits:
- Social Security Number “SSN“, (XXX-XX-XXXX)
- Employer Identification Number “EIN“, (XX-XXXXXXX)
- Individual Taxpayer Identification Number “ITIN“, (9XX-XX-XXXX)
Both SSN and ITIN identifiers are generally used for individuals and TINs that are formatted in the (XXX-XX-XXXX) should be associated with a name that is an individual versus a dba or company name. TINs that are in the XXX-XX-XXXX format, paired with a business or dba are likely not the TIN on file with the IRS and should be verified as they would likely be subject to back-up withholding.
The IRS offers a free service for TIN matching through the On-Line Taxpayer Identification Number (TIN) Matching Program, outlined in IRS Publication 2108A. This service is available at no cost, specifically to reduce the number of back-up withholding notices that are served, and is available for individuals and organizations that are payers of income reported on Forms 1099 B, DIV, INT, K, MISC, OID and PATR.
The TIN Matching Program requires a unique registration from other IRS systems, including the FIRE system for e-file, and is accessible via the eServices Registration home page: https://la1.www4.irs.gov/e-services/Registration/index.htm.
Applicants must be a “Principal” on behalf of the organization and apply for access to the system as an individual. Application to the TIN Matching Program requires personal identifiable information including:
- Your Social Security number
- Your filing status and address from your last-filed tax return
- One financial account number linked to your name
Once registered, a Principal may assign other members within the organization as authorized to submit TIN matching requests.
Know the services for which you are paying vendors.
Payment classification for non-employee compensation is a critical component to avoid late filing penalties and resulting interest. In part of response to increased tax return fraud, the IRS escalated the reporting requirement for the government copy of the 1099 when reporting Non-employee Compensation (NEC). As a result, it is important to understand which of your recipients receive NEC payments, even if they have multiple payment types reported on a single return.
1099 recipients that receive payments that are categorized as NEC (1099-MISC, box 7) must be reported to the IRS, either on paper or electronically, by the last day of January. Other 1099 return types remain due the end of February (or the last day of March, if filing electronically).
If you are filing 1099s prior to the end of January, returns that include NEC payments can be filed together with returns that include non-NEC payments. Once the end of January deadline has passed, returns that include NEC recipients should be filed separately. If NEC payment returns are included in a mixed reporting return, all included returns are subject to the late filing penalties and interest for the NEC filing requirement.
Timeliness, accuracy and diligence are the critical components needed to avoid costly penalties and interest. Start preparing immediately. Audit your current W-9s for accurate TINs. Review vendor payments for NEC classification.
These simple steps can help you, if you start now.