Candidates seeking political offices aren’t the only individuals who are “nominees.” For tax purposes, if you receive, in your name, income that actually belongs to someone else, you are also a nominee. Being a nominee means you must file with the IRS a 1099 form appropriate to the type of income you received and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required.

The most common nominee situation is where a taxpayer and one or more other individuals have a joint financial account, and each person contributed toward the principal that was deposited. For example, let’s say that you and your brother have a joint savings account at Big Bank, into which your brother deposited 30% of the funds and you put in the rest. You’ve agreed to share the income in proportion to your contributions to the account. The annual interest income was $500. Your name and Social Security number were listed on the 1099-INT issued by Big Bank. Of the $500, $150 is actually your brother’s interest and $350 is yours. You will need to issue to the IRS and your brother a 1099-INT for $150 that identifies you as the payer and him as the recipient. On Schedule B of your tax return, you will report $500 of interest income from Big Bank, but will also enter “Nominee Distribution” and $150 as a subtraction. Thus, only your $350 will be taxed on your return. On his return, if he is required to file, your brother will report $150 of income with your name, not the bank’s, as the payer.

If you are a nominee for ordinary dividends received, the same method applies for allocating the income on Schedule B, but Form 1099-DIV is issued instead of 1099-INT. If capital gain distributions from a mutual fund or broker are nominee income, you report only your ownership share on your return and attach an explanation statement to your return; the capital gain distributions would not be included on a 1099-DIV that you issue as the payer.

If, as a nominee, you receive gross proceeds from selling stocks or bonds, you will need to issue a Form 1099-B to the IRS and the actual owner of the income. As with the interest and dividend income received by a nominee, rules are in place for completing your return so that only your portion of the net gain or loss from the sales is included in your income.

Forms 1099-INT and 1099-DIV that you issue as a nominee must be given to the recipients by January 31, while the deadline for giving Forms 1099-B to the other owner(s) is February 15. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records.

If you have questions, please give us a call.

One of the steps we recommend to clients who use independent contractors and who therefore face a heightened risk of a costly IRS payroll tax or benefits audit, is a quick review of some of the key things the IRS tells its agents to look at in determining whether a worker is really an employee.

The primary inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.

Workers are more likely to be classified as independent contractors if they:

• Make a significant investment in business property (a home computer is not significant);
• Pay their own business expenses;
• Receive a flat fee that is not based on an hourly or similar rate;
• Are not prohibited from doing work for other companies;
• Can pay subcontractors to get the job done;
• Are not performing services as an integral part of your regular business;
• Have a contract with an enforceable liquidated damages provision;
• Can make a profit;
• Can suffer a loss.

Workers are more likely to be classified as employees if they:

• Are given specific instructions and on-going training in how to get the work done;
• Cannot work for others;
• Have expenses paid by your company;
• Are paid with a salary or hourly wage;
• Do not have a significant investment in their trade or business;
• Are an integral part of your regular business;
• Receive direct reimbursement for all, or almost all, expenses;

Less important is:

• Whether or not the work is performed on the business’s premises;
• Whether the worker has flexibility in setting hours;
• Whether the relationship is temporary or short-term;
• Whether the work is full- or part-time;
• Whether the worker performs services for one or more businesses.

If you suspect from this list that there might be a problem, we would be happy to come in and do an audit of your hiring practices and suggest effective solutions if necessary.

All businesses make payments to vendors. But are you required to report these payments to the IRS? It depends on who you are making payments to and the amount being paid during the year.

Various types of Forms 1099 must be provided to certain type of payees by January 31, and to the IRS by February 28. Here’s a rundown of some of the more common payments that may require an information return.

• Payments of $600 or more to contractors or other services providers (other than corporations) must be reported to the recipient and to the IRS on Form 1099-MISC.
• Payments to attorneys for business-related services must be reported to the attorney and to the IRS. These payments must be reported on Form 1099-MISC regardless of the amount and regardless of whether the attorney is incorporated or not.
• Rents totaling more than $600 paid to an individual landlord, partnership, or estate (but not rents paid to a corporation) must be reported on Form 1099-MISC. (However, rents paid to a real estate agent are generally not required to be reported.)

These forms must be mailed to the recipient by January 31 and to the IRS by February 28.

Bear in mind that the penalties for failure to comply with these information-reporting requirements can be stiff. For example, you can be hit with a penalty as high as $100 for each return that is filed incorrectly or is not filed on time and deductions on tax returns may be disallowed in audits.

I think it is time for a little lesson on 1099′s for everyone.  Forgive my rant, but every year people start begging for their 1099′s in early January.  They say they “need their 1099 to file their taxes.”  This is simply untrue and tells me that many of them are probably cheating on their taxes.

A 1099-MISC form is issued to a person or unincorporated entity that is paid more than $600 in the calendar year.  If they pay you less than $600, the payor does not have to issue a 1099-MISC but that does not mean it is not income to the receiving party.  The purpose of the 1099 is to notify the IRS that this person should be claiming the income and paying taxes on it.  The IRS then matches this amount reported to the proper return and if it is not reported, the IRS sends out a lovely balance due notice.  Are these individuals that “have” to have a 1099 in order to do their taxes excluding the income from the ten vendors that paid them $500 each that were not required to send a 1099?

Independent contractors are self-employed are businesses whether they know it or not.  Just like any other business, they should keep a proper set of books and records to substantiate their income and expenses.  They are also eligible to deduct qualifying expenses against the income before paying taxes on it.

With electronic filing being done for most returns today, no statements like W2s have to be submitted to the IRS with the returns.  Even with paper filing, you only attach statements showing how much was withheld and remitted to the IRS.  1099s do not normally have withholding so they are not required and never have been required to be submitted to the IRS.

So when I hear someone asking for their 1099, I hear a business owner saying “I do not keep books and records.  I do not keep up with my business as a business.” and “I plan to only claim the income that is sent to the IRS.”  This is a recipe for pure trouble and is the reason the IRS scrutinizes self-employed filers so much.  The truth is that this one the highest concentration of tax cheating that exists in our tax system today.

Do yourself a favor.  If you are a business owner, require all potential 1099 vendors to complete the form W-9 from the IRS before they receive any payments from you.  If they are planning to cheat on their taxes, remember that they may not always be the best vendor for you.  Have a backup!