For small businesses and taxes, it's the year of the 1099s
on January 14, 2012 at 7:00 AM, updated January 20, 2012 at 5:46 PM
If yes, do you plan on getting her one?
If that reads like an interrogation designed to whip your conscience into shape, it is.
It's also the type of passive-aggressive inquiry that self-employed and small-business owners face this tax season. Only it won't be regarding their mothers. It'll be about paying Uncle Sam.
Congress and the Internal Revenue Service are on a mission to cut down on unreported income.
One initiative involving credit card payments created so much additional work and complaint from the finance industry that the IRS already backed down and postponed it for a year.
But a second -- a two-question grilling at the top of a couple of tax forms -- lives on, likely to entrap a few of you.
If you have profits or losses from a business, a rental, a partnership, an estate or a trust, you file Schedule C or E with your federal 1040 return.
At the top of the 2011 versions, you'll find these new zingers:
"Did you make any payments in 2011 that would require you to file Form(s) 1099?"
"If 'Yes,' did you or will you file all required Forms 1099?"
Form 1099s are information returns. They make the IRS aware that someone else has received income from you.
Generally speaking, if you paid any one person or entity $600 for services last year, tax law requires you to send them and the IRS a 1099-MISC. That MISC is for "miscellaneous" income.
Not everyone does that right now, accountants say. Consider the small building contractor who pays his painter, drywaller and other subcontractors in cash. He might not have filled out a 1099 for each. A self-employed consultant who pays a graphic artist $600 for marketing material must file one, too.
This year, for the first time, the IRS is reminding all these taxpayers of their legal obligation directly on tax forms. They're also getting taxpayers on record as to whether they complied.
See what I mean. It's "Law & Order: Special IRS Agents Unit."
"Taxpayers who don't handle these questions the right way are opening themselves up to penalties," said Troy Thompson, a tax lawyer and certified financial planner in Portland. "Perhaps not fraud, but I do expect vigorous assertion of the penalty for intentionally disregarding the requirements."
That could be up to $250 for each 1099 the IRS didn't get and $250 for each 1099 a contractor didn't get, with no cap on the amount. The IRS also might disallow expenses claimed as deductions if they're not documented as they should be on 1099s, Thompson said.
For a while, it looked as if landlords would have to worry about this, too. But last spring, Congress repealed requirements that rental property expenses be documented on 1099s. Only in limited cases do rental property owners need to issue 1099s, said Benson Goldstein, senior technical manager at the American Institute of CPAs.
The deadline to comply with these requirements is coming up. Most 1099-MISCs must be mailed to contractors by Jan. 31. They must be sent to the IRS by Feb. 28, though you have until March 31 if you file them electronically.
"Putting these kinds of 'gotcha' questions on the return is an increasingly common and I think potentially very effective tool in tax administration," Thompson said.
A new law requires payment-settlement entities -- the banks, Visas, MasterCards and PayPals of the world -- to report transactions directly to the IRS. PayPal and similar third-party networks need do this only for merchants who bring in $20,000 and conduct 200 transactions a year.
These payments are supposed to be reported on a 1099-K to both the IRS and the merchants. The IRS expected to receive 53.8 million such forms this season.
Payment processors threw such a fuss about complying with this new law that the IRS in November announced it wouldn't penalize anyone this year who failed to comply. But they're still supposed to go out.
Your business might have a new obligation under this law as well. If you issue a 1099-MISC to a vendor or subcontractor, you're supposed to exclude any amounts paid by debit, gift or credit card or PayPal. That's to avoid duplicate reporting to the IRS.
Payments by cash or check, however, still must be included on those 1099s.
That's going to complicate bookkeeping for coffee shops, restaurants and contractors. It could actually lessen paperwork for those who make all vendor payments electronically.
"I might suggest pay credit card all the time," said Goldstein of the CPAs group. "Therefore, I don't have to issue 1099s."
Others predict many businesses will mistakenly include card payments, meaning some income will get reported twice.
"It's going to be a headache," said Greg Rogers, a certified public accountant in Oregon City.
Valerie Calley, owner of Oregon Trail Yarn & Books in Milton-Freewater, says this new requirement won't hamper most eBay business. She downloads PayPal transactions directly into her QuickBooks accounting software and pays taxes on all Internet sales.
"The 1099-K will be just one more piece of paper to give to the tax accountant," Calley said via e-mail. "I don't think Congress will realize the increased revenue they hoped for from the enhanced reporting requirements."
A spokeswoman for Intuit Inc. said its 2012 QuickBooks and TurboTax software will help users identify and exclude electronic payments from their 1099-MISCs. Instead of upgrading, customers with older QuickBook versions can also download a 99-cent app to exclude such payments.
That's good news for business owners who keep good records. Not so for others.
"A lot of small businesses, frankly, don't pay real good attention to their bookkeeping," said Susan High, licensed tax consultant and owner of Clackamas Income Tax & Accounting Inc. in Gladstone. "Especially ones that try to do it themselves."
It's Only Money believes you can do finances and taxes yourself. But if you're overwhelmed or panicked, seek help. Over the next couple of weeks, I'll explain the types of tax preparers you can use and how to best pick one.
-- Brent Hunsberger welcomes questions about his column or blog. Reach him at 503-221-8359. Follow It's Only Money on Facebook, Google+ or Twitter.
1099-MISC: Business Expenses for Independent Contractors
If you work as a freelancer, consultant or contractor — even as a side gig — your tax situation is more complex than that of someone who draws a regular paycheck.
The IRS considers you an independent contractor if you receive a 1099-MISC form showing your earnings rather than a W-2. That can include folks who moonlight as Uber drivers, freelance writers or consultants, and even (in some cases) attorneys. If you got a 1099-MISC, as far as the IRS is concerned you’re in business for yourself.
You may get paid more than a wage earner because the company making the payment considers you a “nonemployee” and does not have to include benefits, contribute to Social Security on your behalf or withhold your income taxes.
The bad news is that you have to do all those things yourself. The good news is that you can write off some costs associated with the development, maintenance and growth of your business.
As an independent contractor, it’s imperative to make a clear, documented distinction between your business expenses and your personal expenses. If the deductions you claim don’t pass the sniff test, the IRS might take a closer look at your return with an audit.
The federal agency receives a report of your income — copies of your 1099-MISC forms — from the businesses that pay you. Over the course of the year, you’ll have to pay your own self-employment taxes — currently, that’s 15.3% of your net profit to cover Social Security and Medicare taxes — as well as your own estimated income taxes each quarter.
You report your nonemployee income — and claim expenses — on a Schedule C or the simplified Schedule C-EZ. If your net earnings from self-employment are more than $400, you also need to fill out a Schedule SE to determine your self-employment tax. As you prepare to fill out your return, make sure you’ve got all the necessary documentation for income and expenses.
Your net profit is the amount you were paid for your goods or services minus your business deductions. Examples of such deductions include:
- Home office expenses.
- Transportation and travel — both locally and away from your home.
- Business, professional and education licenses, and fees.
- Office supplies.
Each business expense you claim must meet certain criteria:
- Ordinary and necessary: An ordinary expense is one that’s common to your profession. The expense is considered necessary when it’s one that’s appropriate or helpful in developing or maintaining your business.
- Current expense: An expense that benefits your business for less than one year.
- Directly related to your business: An expense that is not related to personal costs.
- Reasonable amount: An expense of a reasonable amount that doesn’t include inflated pricing.
To help independent contractors and other “self-employed” individuals understand their tax obligations, the IRS has set up a website with guidance on everything from quarterly tax payments to home-office deductions.