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Sunday, 25 of February of 2018

Filing requirements for Form 1099′s

There is new question on many of the tax returns and related schedules of which you should be aware: Did you make any payments in the last year that would require you to file Form(s) 1099?

The IRS has begun focusing heavily on taxpayer compliance with information reporting laws.
Generally, any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income.
To properly report the information required on Form 1099, you need to have the provider’s taxpayer identification number (TIN). You can request that the provider fill out and give you a Form W-9, Request for Taxpayer Identification Number and Certification, before work is done or payments are made. If a provider does not supply you with a taxpayer identification number, you are generally required to “backup withhold” 28 percent from any “reportable payments.”

Form 1099-MISC is probably the most filed Form 1099 of the series. You must file Form 1099-MISC, Miscellaneous Income, for each person (subject to the exceptions listed below) to whom you paid during the year:
(1) at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
(2) at least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, or, generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
(3) any fishing boat proceeds; or
(4) gross proceeds of $600 or more paid to an attorney.

In addition, Form 1099-MISC must be used to report direct sales of at least $5,000 of consumer products made to a buyer for resale anywhere other than a permanent retail establishment. Form 1099-MISC must also be filed for each person from whom you may have withheld any federal income tax under the backup withholding rules, regardless of the amount of the payment.
You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business; personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit. For this purpose, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.
Congress has repealed the law it enacted in 2010 that required real estate rental income recipients to report on Form 1099-MISC payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income. Thus, if your rental real estate activities do not rise to the level of a trade or business, you do not have to report those payments on Form 1099-MISC. Of course, if your rental real estate activity does constitute a trade or business, you must continue to report such payments of $600 or more on Form 1099-MISC.

Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which you are not required to file a Form 1099-MISC include:
(1) generally, payments to a corporation;
(2) payments for merchandise, telegrams, telephone, freight, storage, and similar items;
(3) payments of rent to real estate agents;
(4) wages paid to employees (these must be reported on Form W-2, Wage and Tax Statement);
(5) military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services (these also must be reported on Form W-2);
(6) business travel allowances paid to employees (may be reportable on Form W-2);
(7) cost of current life insurance protection (must be reported on Form W-2 or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.);
(8) payments to a tax-exempt organization, including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government; and
(9) certain payment card transactions if a payment card organization has assigned a merchant/payee a Merchant Category Code (MCC) indicating that reporting is not required.
Attorney fee payments made to corporations generally must be reported on Form 1099-MISC.
If you fail to provide Form 1099s and cannot show reasonable cause for the failure, you may be subject to a penalty. The penalty applies if you fail to provide the statement by the deadline, fail to include all information required to be shown on the statement, or include incorrect information on the statement. The penalty is:
(1) $30 per information return for returns filed correctly within 30 days after the due date (by March 30 if the due date is February 28), with a maximum penalty $250,000 a year ($75,000 for certain small businesses);
(2) $60 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty $500,000 a year ($200,000 for certain small businesses); and
(3) $100 per information return for returns filed after August 1 or not filed at all, with a maximum penalty $1,500,000 a year ($500,000 for small businesses).

Unless you specifically engage me to prepare your 1099s, you are responsible for preparing and filing Forms 1099. If you are audited, the IRS will want documentation of expenses and will look at whether 1099s were filed. Any wage and labor amounts to be deducted on your return will be separately classified and will not be hidden or bundled with other expenses, since there are specific lines on the returns for wages and labor.

Should I make my new hire an Employee or Independent Contractor?

business tax vero beachA business generally must withhold and pay income, social security, and Medicare taxes, and pay federal unemployment taxes, on wages it pays to common-law employees. For Independent Contractors a business generally must file a Form 1099.

This blog provides general information on determining whether a worker is a common law employee or an independent contractor.

Generally, the term “employee” includes any individual who, under the common law rules for determining the employer/employee relationship, has the status of an employee. Under common law, a worker is an employee when the person for whom the services are performed has the right to control and direct the individual who performs the services. An employee must be subject to the will and control of the employer not only as to what work is to be done, but also how the work is to be done.
Over time, the IRS and Social Security Administration compiled a list of factors used in court decisions to determine worker status. The IRS has grouped those factors into three “categories of evidence”: (1) behavioral control, (2) financial control, and (3) relationship of the parties.

The behavioral control category of evidence consists of evidence that substantiates the right to direct or control the details and means by which the worker performs the required services. Factors in this category include instructions the business gives to the worker, evaluation systems, and training the business gives to the worker.

The financial control category of evidence consists of evidence of the economic aspects of the relationship between the parties, which are an indication of who has financial control of the activities undertaken. Factors taken into account include the extent of the worker’s investment in the facilities or tools he or she uses in performing services; the extent of the worker’s unreimbursed expenses; the extent to which the worker makes his or her services available to the relevant market; how the business pays the worker; and the extent to which the worker can realize a profit or loss from his or her work.
The relationship-of-the-parties category consists of evidence that reflects the parties’ intent concerning control. Factors in this category include any written contracts between the parties; whether Form W-2, Wage and Tax Statement, have been filed for the worker; whether the worker receives benefits traditionally associated with employee status; and the permanency of the relationship between the worker and the business.

Please call me at your convenience if you would like me to help you setup your new hire as an employee or independent contractor.

Sales Tax on Residential Rentals

People on the Florida Treasure Coast have received letters from the Florida Department of Revenue asking if they paid Sales Tax on their Residential Rental Property and suggesting that they take advantage of the amnesty the Department of Revenue is offering.

The first questions asked when someone gets this letter, is “how did they get my name how did Florida Department of Revenue know?” The answer to this question is three fold. First, they went to the Tax Assessors of Indian River, St. Lucie, Martin and Okeechobee counties and asked for a list of the owners of properties without a homestead exemption. Then they went to the Internal Revenue Service and got a list of people who filed rental income on Schedule E. Finally, the DOR then compared those taxpayers who have non-homestead property and reported rental income to the IRS with those people who did not file a sales tax return. If you made all three lists then you were a “winner” and got a letter. 

The next question is “do I have a problem?” 

Generally, commercial rentals are subject to sales tax so if you rent commercial property or rent to a business then the law requires you to collect and pay the sales tax. If you did not charge the sales tax, you are still responsible to pay it.

 When you rent residential property things can get complicated. Here again there is a general rule, that helps simplify. If you have a long-term rental then it is exempt from sales tax and you are exempt from collecting and paying the tax. If all you rentals are long-term residential properties then you don’t even have to register with the DOR or file a return. 

However, when is a residential rental long term? 

If you rent to a tenet for six months or less it is short term or a transient rental, six months and one day it is long term. The DOR will look at your lease to make this determination. But what if you don’t have a lease, and rent on a Month to Month basis? In this case, tax is due on the first six months of the rental, then for the rest of the time that tenet lives in that house it is tax-free. It does not matter if you and the tenet expect this to continue for more than six months. If you don’t have a lease, it is subject to sales tax!

What if you have a lease for six months and one day and your tenet skips out after three months? Then you are OK, you had a long-term lease; no sales tax is due. 

That is not all. If you have a short-term rental and owe sales tax to the State of Florida then you also owe Tourist Development Tax to the county. If you think sales tax is complicated then just wait for the next post. The Tourist Development Tax is down right convoluted.