Filing 1099-Misc for Independent Contractors

Small business owners guide to Independent Contractor taxes.

Many a times, small business owners hire outside contractors to work on a temporary, short-term, peripheral tasks. IRS defines them as owners or contractors who provide services to other businesses. Some examples include janitorial service, website developers, tax consultants, interior decorators etc.

Independent contractors are external consultants or subcontractors who are not on your company’s payroll. They are just paid the amount mutually agreed upon. No FICA taxes (social security and Medicare taxes) are withheld from payments and you do not file their taxes.

However, you cannot, still, sit back and relax after cutting out that check!

You are required to issue a Form 1099-Misc to the contractor by the end of January each year. It includes information on the compensation paid in the previous calendar year. Make sure that all independent contractors have given you a signed form W-9, that provides taxpayer ID (TIN). If they do not provide you with a valid taxpayer id (TIN), be prepared for Backup withholding.

Anatomy of a 1099-Misc

The 1099-Misc has 5 vital parts, each with its own significance:

·         Part 1 is called copy A, is sent to the IRS.

·         Part 2 is called copy 1, is sent to the state tax dept.

·         Part 3 is called copy B, is sent to the recipient.

·         Part 4 is called copy 2, is for the recipient to file.

·         Part 5 is called copy C, your copy.

 

Printed or Electronic?

If you have more than 249 vendors for whom you must file 1099-misc forms, IRS regulations require that you submit the forms electronically, go green!

However, if you file printed Form 1099-Misc with the IRS, you might as well use some more paper and also file Form 1096 (Annual Summary and Transmittal of US information returns). Form 1096 is the summary of information from all 1099 forms.

Threshold values for 1099 contractors:

Do you really need to file 1099-MISC?

If the vendor is paid less than $600, you really do not have to file 1099-Misc.

Also, according to William Perez, Guide to Tax Planning, you do not need to file 1099-Misc for payments made by credit card or other third-party processor.

Here are some more guidelines to filing 1099-Misc:

File Form 1099-Misc for each person to whom you have paid:

1. At least $10 in royalties or broker payments in lieu of dividends or tax exempt interest.

2. At least $600 in rents, services, prizes, awards or other income payments, medical, health care payments.

3. Any fishing boat proceeds.

4. Direct sales of at least $5000 of consumer products to buyer for resale.

5. Accrued wages, vacation pay, and other compensation paid to an estate or beneficiary after the date of death of a deceased employee.

6. At least $600 in remuneration to independent contractors.

7. At least $600 in remuneration to directors.

8. From whom you withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.

In case, you decide to employ any of the wonderful people who worked for you as independent contractors, and have them work exclusively for you, refer my earlier post:

Employers Guide to Payroll taxes

Tax Preparation Business: Employers Guide to Payroll Taxes

Checking on your Payroll Provider

Outsourced Payroll, but did you check on your Payroll Providers?

The easiest way to do payroll, quite frankly is to sign up with a third party payroll provider, even if you have an accountant. In addition to processing your employees’ paychecks on time, your federal tax liabilities and state tax liabilities are paid as part of the service.

Behind the scenes…

Filing the right forms

To stay in compliance, at the end of each quarter your payroll provider will file your federal and state payroll tax forms with the appropriate agencies. A separate Form 941 is filed for each quarter. The first quarter is January through March. The second quarter is April through June. The third quarter is July through September. The fourth quarter is October through December.  Form 941 is generally due by the last day of the month following the end of the quarter. For example, wages you pay during the first quarter, January through March, must generally be reported on Form 941 by April 30th.

In addition to 941 Federal and Quarterly state forms, the yearly forms that are required to be filed are:

1.       944 Federal: To reduce the burden on small business taxpayers, IRS allows employers with small payrolls (liability < $1,000), including government employers to file an annual Form 944.

2.       W-2 and W-3

3.       940 Federal

4.       Annual State Reconciliations

The copies of these forms, that your payroll provider files, should be available to you by May 5, August 5, November  5, February  5 and March 5 of the respective quarter.

Depositing the taxes

The payroll providers withdraw money from your bank account to pay the appropriate Federal or State government agency.

·         If tax liability < $2,500 per quarter, deposit tax with return filing.

·         If tax liability > $2,500 per quarter, deposit tax according to the deposit schedule i.e. monthly or semiweekly.

Beginning January 1, 2011, all deposits must be made by electronic funds transfer using the Electronic Federal Tax Payment System (EFTPS). Late deposits are subject to penalties.

You should verify with the Payroll provider if they support payment of the local payroll taxes, workers compensation on your behalf, because these payments are the responsibility of the employer.

Visit http://www.maximtaxservices.com/services.html to find out the latest offerings in payroll services from Maxim Tax Services.

Registered Tax Return Preparer Competency Test 2012

To ensure competency and professional standards in the tax preparation industry, IRS has announced a new designation: Registered Tax Return Preparer (RTRP)

The test consists of 120 questions and has a perfect score of 500. Minimum score to receive a passing grade is 350. In addition to the test, it is also required to pass the tax compliance check performed by the IRS, which is generally completed within a couple of weeks after the test score is issued.

The test can be scheduled at IRS.gov/ptin and can be taken at more than 260 sites at Prometric test centers in most major metropolitan areas.

The testing fee is $116 and the results are available immediately after completion of the test at the test center.  The testing will be suspended for a two week period  between April 1, 2012 and April 15, 2012.

Refer IRS.gov/taxpros/tests

RTRP Exemption Criteria:

·         Certified Public accountants, attorneys, enrolled agents

·         Non-signing preparers who are supervised by Certified Public accountants, attorneys, enrolled agents

·         Preparers who do not prepare Form 1040 series.

RTRP Test Content Outline

The test domain areas consist of :

1.       Preliminary Work and Collection of Taxpayer Data

2.       Treatment of Income and Assests

3.       Deductions and Credits

4.       Other Taxes

5.       Completion of the Filing Process

6.       Practices and Procedures

7.       Ethics

Pre-test study material for RTRP 2012:

• Circular 230, Regulations Governing Practice before the Internal Revenue Service (Rev. 8-2011)

• Form 1040, U.S. Individual Income Tax Return (2010)

• Form 1040 Instructions (2010)

• Form 2848, Power of Attorney and Declaration of Representative (Rev. 6-2008)

• Form 2848 Instructions (Rev. 6-2008)

• Form 6251, Alternative Minimum Tax – Individuals (2010)

• Form 6251 Instructions (2010)

• Form 8821, Tax Information Authorization (Rev. 8-2008)

• Form 8867, Paid Preparers Earned Income Credit Checklist (Rev. 12-2009)

• Form 8879, IRS e-File Signature Authorization (2010)

• Publication 17, Your Federal Income Tax* (2010)

• Publication 334, Tax Guide for Small Business (2010)

• Publication 596, Earned Income Credit (EIC) (2010)

• Publication 970, Tax Benefits for Education (2010)

• Publication 1345, Handbook for Authorized IRS e-file Providers (2010)

• Publication 4600, Safeguarding Taxpayer Information Quick Reference Guide for

Businesses (Rev. 10-2008)