1099 Forms: 5 Key Reporting Changes for Businesses

According to the IRS, under-reporting of income is the biggest contributing factor to the IRS tax gap--the amount owed by individuals and businesses versus the amount that was actually paid in taxes. In 2006, the most recent year for which data are available, under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap.

Overall, the IRS found that compliance is highest where there is third-party information reporting (1099 forms used to report taxable income earned that is not considered salary and wages) and/or withholding (W-2 forms). In the case of W-2 forms, the IRS found that a net of only 1% of wage and salary income was misreported; however, amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

In an effort to close that tax gap, the IRS has changed some reporting requirements for 1099s for tax year 2012. Here are some of those key changes:

1. 1099-MISC. Starting in 2012, businesses are required to issue 1099s to any vendor (individual or business) that provides good and services worth more than $600 in a given year. For example, let's say you are the owner of a small, but successful company that makes handcrafted soaps. If you buy more than $600 worth of goods from a particular supplier, you'll need to send that supplier a Form 1099-MISC. Likewise, if you paid ABC Company more than $600 to create a new website for your business, you'll have to send him or her a 1099-MISC.

In addition, compensation of $600 or more paid in a calendar year to an H-2A visa agricultural worker who did not give you a valid taxpayer identification number must be reported on 1099-MISC. You must also withhold federal income tax under the backup withholding rules. However, if the worker does furnish a valid taxpayer identification number, then report the payments on Form W-2.

2. 1099-B. New boxes have been added to Form 1099-B for reporting the stock or other symbol (box 1d), quantity sold (box 1e), whether basis is being reported to the IRS (box 6b), and state income tax withheld (boxes 13-15). Other boxes on the form have been moved or renumbered. In addition, brokers must report on Form 1099-B sales of covered securities by an S corporation if the S corporation acquired the covered securities after 2011.

3. 1099-C. The titles for boxes 1, 2, and 6 on Form 1099-C have changed. Box 1 is now Date of Identifiable Event; box 2 is now Amount of Debt Discharged; and box 6 is now Identifiable Event Code, and requires the entry of a code for the identifiable event. See Box 6--Identifiable Event Code. For 2012, all codes are optional except for Code A--Bankruptcy.

4. 1099-DIV. Exempt-interest dividends from a mutual fund or other regulated investment company (RIC) are now reported on Form 1099-DIV and are no longer reported on Form 1099-INT, Interest Income. Also, boxes 12 through 14 have been added to Form 1099-DIV to report state income tax withheld.

5. 1099-INT. Exempt-interest dividends from a mutual fund or other regulated investment company (RIC) are no longer reported on Form 1099-INT. Instead, those amounts are reported on Form 1099-DIV, Dividends and Distributions. In addition, boxes 11 through 13 have been added to Form 1099-INT to report state income tax withheld.

If you need help with 1099s this year, don't hesitate to give us a ring. We're happy to help you out.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

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House Passes Senate Budget Bill Convincingly: We Have A Tax Deal!

The House voted on the budget after all, and they voted up or down, rather than amending the Senate bill. The House voted “Yea” and they did so quite convincingly (257 YEA to 167 NAY).

Here’s what the bill does:

Income tax

• The tax cuts were extended – permanently – for all but those at the top. For this purpose, the top means $400,000 for individual filers and $450,000 for married couples. The top tax rate will increase to 39.6% from 35%.
• The Pease and PEP (personal exemption phaseout) restrictions on limitations were also extended. The applicable thresholds for the caps are $250,000 for individual filers and $300,000 for married couples.
• Capital gains tax rates and dividend tax rates stay low for most taxpayers. Taxes on capital gains and dividends will increase to 20% for taxpayers at the top.
• The alternative minimum tax (AMT) will be permanently adjusted for inflation. This is in red for a reason. Congress hasn't fixed this in more than 40 years. Each year, they put a “patch” on it instead of actually doing anything to fix it. This, for me, is the biggest surprise in the bill.
• Also extended for five years (not permanently) are number of individual tax credits including the child tax credit, the controversial earned income tax credit (EITC), and the American Opportunity Tax credit (the souped up version of the Hope Credit).
• On the deduction side, a couple of above the line deductions were extended, including the deduction for school teachers expenses and the tuition and fees deduction. On the itemized deduction side, the option to deduct state and local sales taxes in place of state and local income taxes was extended for a year.
• Surprising many (govtrack.us gave it a 1% chance of passing as a separate bill), the parity between the exclusion from income for employer-provided mass transit and parking benefits was extended. Without the extension, parking benefits would be disproportionately higher than those for mass transit.
• On the charitable side, while the Pease limitations were kept (mostly) at bay, the opportunity to make tax-free distributions to charitable organizations was extended. This is good news for retirees who want to donate their IRAs – and charities who want their money.

Payroll tax

• Payroll taxes are going up. As expected, the payroll tax holiday is allowed to expire. The employee portion of Social Security contributions will return to 6.2%.

Estate tax

• The federal estate tax exemption remains at $5.12 million (indexed for inflation). The top tax rate will be 40%, higher than the current rate of 35% but lower than what would have happened under the lapse.

Sequester

• The sequesters (automatic cuts) have officially been pushed off for two months.

Other stuff

• Long-term unemployment benefits are extend for one year.
• The so-called “doc fix” is also in play for one year. That means that the planned cuts – 27% – in Medicare reimbursements for physicians will be pushed off until 2014.
• A law allowing the IRS to communicate with prisons (yes, this is a big problem when it comes to fraud) was made permanent.
• The farm bill was also extended; no $7 gallon jugs of milk in 2013.

I don’t think the business tax provisions were terribly significant but some of the extensions deserve a nod. I do think the political capital involved in this one will have long-reaching effects… Look for that commentary in another post (otherwise, this one will never end).

The bill has yet to be enrolled (a fancy way of saying the two versions of the bills from the House and Senate have to match as one document) but you can read the Senate version here.

Article originally published on Forbes.com by Kelly Phillips Erb - 01/02/2013

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701