Americans know that if you work and earn income, you probably need to file an income tax return. We accept the responsibility for determining whether or not we need to file, and we know what our deadlines are, without reminders from the IRS or our CPA.
We’re pretty good at remembering to file income tax returns, but they aren’t the only type of returns we may be legally obligated to file. There is a multitude of reporting forms that individuals and businesses should be aware of, and the ones we are ignoring could cause us great harm. Let’s shine a much-needed spotlight on the filing of Forms 1099, because too many farmers are glossing over their legal requirements, and such a mistake could cost them thousands of dollars.
According to IRS.gov, the most recent “Tax Gap” research reveals that $385 BILLION in taxes were paid late, or not paid at all, in 2006. Obviously, there is a huge incentive for the government to track down that tax revenue and collect it, but how are they doing that? Part of the answer is through a crackdown on 1099 compliance.
Understanding the 1099 issuance process is crucial – because the legal obligations begin long before you issue your first 1099. Any time you agree to do business with a new party, the law requires you to issue Form W-9 to them, before you pay them anything. By filling out a W-9, your vendor has given you the information you’ll need to prepare their 1099 when the time comes. Perhaps more importantly, they have also given you assurance that they do not owe money to the Federal Government that is subject to backup withholding – which would require you to send part of what you pay them to the IRS instead. If you fail to collect Form W-9 and you pay a vendor who is subject to backup withholding, you can be penalized and required to pay up to 28 percent of what you paid that vendor, out of your own pocket.
A 1099 is considered an Information Return. That means that it gives taxpayers valuable information needed to prepare their income tax returns, and it provides the IRS with an expectation of the income those taxpayers must report. When the IRS makes sure they report it, that income is prevented from becoming a part of the Tax Gap.
As a farmer or a business owner, you are legally obligated to issue a 1099 to any non-incorporated party to whom you pay $600 or more for non-employee labor, interest or rent during a tax year. If you file 1099s late, or forget to file them, penalties range from $30 to $250, per 1099. In addition, your income tax return must now be signed, by you and your tax professional, under penalties of perjury, stating that your 1099 filing obligations have been met. 1099s must be issued, annually, by January 31.
