JANUARY TAX ITEMS
As we ring in the new year, SL would like to remind you that January tax filings are just around the corner. In addition to annual W-2’s, this alert highlights several of the upcoming filing requirements for payroll and other informational reporting and compliance matters.
New Form for Reporting Non-Employee Compensation
Making its debut in 2020, the latest Form 1099-NEC will once again be used to report non-employee compensation for 2021. Persons who paid income to non-employees during 2021 must provide the income recipient with a Form 1099-NEC, and the form must be submitted to the IRS no later than January 31, 2022. Form 1099-MISC will continue to be used to report payments of certain royalties, rents, prizes, and other payments of income (other than non-employee income). Note: The IRS imposes a penalty on taxpayers that fail to file correct information returns (Form 1099/1096) with the IRS. There is also an additional penalty for failure to provide the payee with a correct copy of the information return.
Am I required to send 1099’s, and if so, to who?
Any entity or individual engaged in a trade or business that makes certain payments of $600 or more during the calendar year, must file applicable 1099s. This includes payments made for rent, director’s fees, prizes and awards, medical and health care payments, attorney fees, labor, commissions, and other outside services. Payments of interest, royalties, or dividends of $10 or more by entities other than individuals will also require the filing of a 1099.
Payments for which a Form 1099 is not required include payments to governments or a corporation (including a limited liability company (LLC) that is treated as a C or S corporation), except for medical, health care, or law corporations. Payments for merchandise, telegrams, telephone, freight, storage, and similar charges are also not required. Payments made by credit or debit card, or through a payment processor (PayPal, Square, Stripe, etc.) are also not required to be reported on Form 1099. However, see more regarding changes to the 1099-K reporting below.
Review your vendor information and Forms W-9
When your business onboards a new vendor, the process should include receipt of a W-9 prior to making any payments. The W-9 forms are used to prepare Form 1099’s and to avoid backup withholding issues. The Form W-9 requires vendors to disclose whether they are set up to do business as an individual or some other type of entity (including whether they are a corporation, for which a Form 1099 will generally not be required), in addition to their address and taxpayer identification number (TIN). Persons or entities that have not furnished their correct tax identification number (TIN) to you are subject to backup withholding at 24%. Caution: During some IRS audits, the IRS has assessed backup withholding even if the taxpayer identification number (TIN) was later obtained. Therefore, we highly recommend reviewing your vendor files to make sure you have a Form W-9 on file for every vendor you have paid for the calendar year, and if not, request them now! It’s also a good policy for your business to have each vendor fill out a new W-9 form every year or two, as they can change. Form W-9 can be downloaded from the IRS here.
Rental real estate activities and the importance of filing Form 1099
The IRS has taken the position that if you take the 20% QBI deduction for your rental real estate activities, you should also be filing any required Form 1099’s. Located in the Final 199A Regulations, the IRS states: “taxpayers should consider the appropriateness of treating a rental activity as a trade or business for purposes of Section 199A where the taxpayer does not comply with the information return filing requires under Section 6041.” Failure to comply with 1099 filing requirements could result in the IRS denying the QBI deduction – a severe penalty indeed! So, it is critical to determine whether your rental activities rise to the level of a trade or business, and if so, that you file Form 1099’s when required.
Major changes to 1099-K Reporting for 2022:
The threshold for receiving Form 1099-K, Payment Card and Third-Party Network Transactions, was drastically lowered as part of the American Rescue Plan Act that was signed into law on March 11, 2021. The 1099-K requires payment card companies, such as Visa or PayPal, to report payment transactions they have processed on behalf of retailers. Prior to the recent change, you would have received a Form 1099-K from a credit card/payment company if in the previous calendar year, you received gross payments from payment card transactions (debit, credit, or stored-value cards) that exceeded $20,000, and had more than 200 such transactions. However, beginning in 2022, the new gross payment threshold has been lowered to a mere $600 with no transaction minimum. A big drop from the old $20,000 threshold.
New Form W-4 and Employee Information Review:
Now is also a perfect time for employees to verify their I-9 or W-4 information. It is important that you have accurate names, social security numbers, and addresses on file for your employees prior to preparing their 2021 Form W-2’s. Note: The IRS may charge employers a penalty for each return or Form W-2 that has a missing or incorrect SSN or Federal identification number. Please have your employees review their information on file and update their payroll information for any changes or corrections as soon as possible.
A new Form W-4 went into effect on January 1, 2020. Only current employees who would like to change their W-4 withholdings, those who filed as tax-exempt in 2019, and new hires will need to submit the new form.
Reminder Regarding North Carolina’s Contractor Income Tax Withholding Rules:
A payer must deduct and withhold 4% North Carolina income tax from nonwage compensation paid to a “payee” if the payer expects to pay more than $1,500 to the payee in that calendar year. Under the law, a payee is any of the following: a) a nonresident contractor (individuals or entities), b) An ITIN contractor (including those who have applied for an ITIN or have an expired ITIN), c) a person that fails to provide the payer with a taxpayer identification number (TIN), OR d) A person that fails to provide the payer a valid taxpayer identification number (TIN), subject to notification from the Department of Revenue that the TIN is invalid. There are certain exceptions to the new withholding rules. For example, tax is not required to be withheld from compensation paid to a non-resident entity if the entity is a corporation or limited liability company that has obtained a certificate of authority from the North Carolina Secretary of State. However, the payer must obtain from the entity, and retain in its records, the entity’s identification number issued by the North Carolina Secretary of State. Note: The law imposes personal liability on responsible personal for unpaid income taxes required to be withheld by the business.
Smith Leonard can help you with your 1099 and other information return filing requirements
If you would like Smith Leonard to assist in the filing of your Form 1099’s for 2021, please complete the 1099 Preparation Template and upload it to our Secure Citrix ShareFile site no later than January 21.
Note: For security purposes, we respectfully request that you DO NOT send us any 1099 information via email.