The IRS strongly urges taxpayers not to file amended returns related to the new legislative provisions or take other unnecessary steps at this time.
The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable.
For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with the software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return.
For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Nineteen states have effectively taxed this income, either directly or by denying related expenses. And interestingly enough, seven of those states have legislation currently pending to make these funds non-taxable; at this rate, they are unlikely to get approved before tax season is over.
(I may complain plenty about Illinois’ tax laws, but thankfully they have conformed with the federal guidance here.)
The Tax Foundation provides an excellent list of which states tax PPP income and/or deny PPP expense deductions — and goes deeper into the weeds for states that may not have Income Tax but do have a Gross Receipts Tax. Do yourself a favor and check it out before filing your taxes.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Understandably, there is some confusion this year about unemployment compensation, how it is reported to recipients, and what tax forms taxpayers might need to report it on their returns.
The Illinois Department of Economic Security (IDES) created the helpful infographic above, as well as an Info Sheet, which I’m sharing in its entirety here so it’s easy for folks to find.
From the Illinois Department of Employment Security (IDES) – January 2021
Background
All individuals who received unemployment insurance (UI) benefits in 2020 will receive the 1099-G tax form.
ClaimantswhocollectedUIbenefitslastyearneedthe1099-GtaxformfromIDEStocompletetheirfederalandstatetaxreturns.The 1099-G tax form will be available by the end of January 2021 and mailed or emailed to IDES claimants based on previously selected claimant preference.
The 1099-G form is necessary for individuals who received state and/or federal benefits. This pertains to claimants who received both regular UI benefits and benefits paid under new federal pandemic relief programs including Federal Pandemic Unemployment Compensation (FPUC), state Extended Benefits (EB), Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Lost Wages Assistance (LWA).
How to Access the 1099-G Form
Upon establishing an IDES account, claimants are provided an option to receive their 1099-G form electronically. Those who opted for electronic delivery will receive an email notification towards the end of January 2021. This email will contain instructions to access the document from the IDES website.
For those who opted NOT to receive their 1099-G form electronically, IDES will mail a paper form during the last week of January. These claimants may also access and print their 1099-G form online by going to ides.illinois.gov/1099G, or calling Tele-Serve at (312) 338-4337.
Fraud Warning
If an individual did not receive UI benefits in 2020, yet still received a 1099-G form from IDES, this may indicate that a fraudulent claim was filed in their name. The IRS has provided guidance to states regarding these nationwide identity theft and unemployment fraud schemes. Individuals who may have erroneously received a 1099-G formshould immediately contact IDES at (800) 244-5631.
IDES representatives will return calls on a first-in, first-out basis to ensure the fraudulent claim is shut down, and to address the 1099-G form. Once a fraudulent claim is reported, investigated, and confirmed by IDES, the victim will not be held responsible for repaying any benefits fraudsters may have received in their name, nor will they be held responsible for tax implications resulting from a fraudulent claim. IDES understands the urgency associated with tax season and is committed to ensuring agency resources are available to assist individuals who received a form in error.
See the recent alert on 1099-G forms from the U.S. Department of Justice National Unemployment Insurance Fraud Task Force.
Additional Information and Questions
Additional information on 1099-G forms is available at ides.illinois.gov/1099G. For tax filing information, individuals are encouraged to call the IRS at (800) 829-1040 or visit their website at irs.gov.
Individuals can also contact the Department at 800-244-5631 and select the appropriate queue to speak with an expert:
• Select your language
• When prompted, press2to indicate you are an individual
• Next, press1if you received a 1099-G form in error, or press2for all other 1099-G related inquiries
If you are already awaiting a callback for a different inquiry, we will be able to handle your 1099-G related questions on that same call. There is no need to queue for an additional callback.
Additional FAQs are available here. With questions about tax filing, please visit the IRS.
Tax fraud can result in criminal penalties. Some of the criminal activities in violations of federal tax law include deliberately underreporting or omitting income or hiding or transferring assets or income. See https://www.irs.gov/compliance/criminal-investigation/types-of-fraudulent-activities-general-fraud. Federal criminal penalties can include fines and imprisonment. See 26 U.S.C. §7201, §7206, and §7207. Under Illinois law, intent to defraud for tax purposes may be inferred from conduct such as concealment of assets or covering up sources of income, or any other conduct, the likely effect of which would be to mislead or conceal. See 86 Illinois Admin Code 700.330(c). State law provides penalties for tax fraud. 35 ILCS 735/3-6.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
I recently wrote about reasons to hold off on Paycheck Protection Program (PPP) forgiveness applications for the time being. Among them is the complex interaction between PPP and the Employee Retention Credit (ERC), which previously was not permitted as an option for financial relief for those that had received PPP funding.
Because ERC is now available for small businesses who have accepted PPP funds — but not for the same payroll dollars (no double-dipping) — there are some pretty complicated calculations that, if done right, could generate a great deal of financial relief to a lot of independent business-owners in need.
The notice explains (1) who are eligible employers; (2) what constitutes full or partial suspension of trade or business operations; (3) what is a significant decline in gross receipts; (4) what is the maximum amount of an eligible employer’s employee retention credit; (5) qualified wages; (6) how an eligible employer claims the employee retention credit; and (7) how an eligible employer substantiates the claim for the credit.
Summary of the 2020 Employee Retention Credit
As a reminder, the 2020 ERC is a payroll tax credit available to business owners whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. (Note: in the new IRS guidance it also states that if “the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order”, your business may be eligible for ERC — even though there was no governmental order in your area.)
The credit comprises 50% of up to $10,000 in wages to each employee. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC.
Keep in mind that the ERC is complex, and this blog post will not walk you through the specifics — I’ve included a list of some of my favorite resources below. The goal here is to share the steps in our firm’s approach toward these calculations for our clients.
So let’s start with a couple of things to be aware of before we go through the steps that my firm plans to walk through come May/June.
First, the ERC is not generally as valuable as the PPP. It is a payroll tax credit, rather than actual cash funding (though you can file for an advance on it).
And the ERC did not get the benefit of having Congress declare its related expenses deductible, like the special treatment that PPP costs received. So you will lose all the deductions for the payroll tax dollars on which you receive the credit. Deductions aren’t worth as much as credits, so you still come out ahead. But if you’re choosing PPP or ERC for a given payroll dollar, you want to pick the PPP first — up to the minimum 60% requirement for that loan to be forgiven.
However, once you’ve reached that 60% requirement, if you can use non-payroll costs for the remaining 40%, then you “free up” the rest of the payroll dollars to be used for ERC. So you’ll want to work on PPP1 forgiveness applications at the same time as 2020 ERC calculations — they are related to each other, and changing one will potentially affect the other.
But what does this mean for companies filing income tax returns for 2020? Businesses that later decide to retroactively claim the ERC will need to file amended income tax returns — or preferably, put their income tax returns on extension until they have claimed the ERC for 2020. We had previously thought that cash-basis filers could potentially claim the income for the credit and the associated reduction in payroll costs on the 2021 income tax return, but that was ruled out with the most recent IRS guidance.
Steps to Evaluate Payroll for PPP vs ERC
The hope is that in most cases you’ll be able to do Steps One and Two and skip the rest. But just in case, Steps Three and Four will take you the rest of the way there.
Step One When figuring out how to combine ERC and PPP, literally make a calendar for each client and work from that.
a) Determine dates for which you qualify for ERC, based on either: – the full or partial shut-down period, or – a gross receipts decline of 50% over the same quarter in 2019 (the latter qualifies you from the beginning of that quarter to the end of the quarter where receipts go back up to 80%)
Keep in mind that both scenarios may apply, but for different periods — for example, the business was shut down on 3/18/20, and then later fully reopened… and then the 50% revenue drop started in the following quarter.
Note: you may want to find out the exact dates that your client’s city/county/state decreed full-capacity indoor dining was illegal — for those dates, restaurants qualify for ERC based on “full/partial shut-down” rules. If your client is a gym, bar, or other type of non-essential business that had hours limited, find out the exact full-or-partial shut-down dates decreed for that industry in that specific area.
b) Determine PPP covered period. For most folks, this will be the 24 weeks starting on the date of loan fund disbursement.
c) Determine the “bookend” periods — the time both before and after the PPP covered period; for the timeframe when the client qualified for ERC but was not in the PPP realm.
Step Two You may be able to skip the rest of the steps by eyeballing whether you’re able to claim the entire 2020 ERC of $5k per employee (on the first 10k paid to each) all in one quarter — for most businesses this would usually be the final quarter of the year. Then, not only will you not have to worry about overlapping PPP and ERC payroll dollars, but you also will be able to claim this through most payroll companies and not have to manually amend the 4Q 2020 Form 941. Double-bonus!
If not, then see if you can get the full $5k per employee ERC (again, on the first 10k paid to each) using only the periods before and after the PPP1 covered period. You at least eliminate the need to juggle the PPP payroll dollars along with the ERC payroll dollars during the covered period.
Step Three If that’s not an option — if you can’t get to the full 10k within the bookend periods — then:
Before you work on PPP1 forgiveness, subtract whatever the 2020 unallocated ERC balance is after Step 2 (not to exceed 10k of wages per employee) from the payroll amounts during the PPP covered period — before putting numbers in the forgiveness application, just to make sure you can still get full forgiveness at this rate. This is just a “gut check” to see if you can eliminate the need to run the actual ERC calculations for the PPP covered period.
If so, then go ahead and take ERC on the difference, even if you haven’t figured out the specifics of your PPP1 forgiveness yet.
Step 4 If you can’t get full forgiveness on PPP1 at this rate, then go ahead and fill out the PPP1 application in full, using only 60% of the PPP funds to allocate payroll.
Then see how many payroll dollars are “left over” to be used for ERC.
And remember that you can use payroll from employees who made over $100k annually for ERC during the PPP period — because those dollars are not eligible for PPP (due to rules and limitations specific to that program), but they are eligible for ERC.
You can also count — for ERC purposes — dollars that were above 60% of the PPP loan, and therefore are not needed for forgiveness (presuming the business has sufficient eligible costs to make up the 40% “non-payroll” portion of PPP forgiveness).
Think of it this way: you are effectively reducing the ERC subtraction amount per-employee from PPP forgiveness until you get to full PPP forgiveness… and taking 2020 ERC on the balance (since as I mentioned before, the PPP payroll dollars are more tax-advantaged than the ERC dollars).
Does this four-step process sound easy? No! It’s not. It may not in fact be worth it for most small business clients to pay a professional to scoop up the remaining piddly amounts in the PPP covered period — in which case, consider just using Steps One and Two: the amounts in the bookend periods, or even better, just the amount from the final quarter (because that way they don’t have to pay you to manually prepare a 4Q Form 941, either).
But reviewing this approach before going in and working on all the client ERC and PPP calculations should help a great deal in identifying where the bulk of the payroll dollars are that will qualify for the ERC program, and will allow you to make intelligent decisions about which periods to mine for this type of financial relief for your small business clients.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Many clients and colleagues have reached out to me over the past two months to ask whether they should apply for PPP1 forgiveness yet, and my answer (and that of the AICPA) is still “not quite yet”. But rather than just pushing off the question of “but when” into the future, I wanted to publicly share our company’s strategy and timeline for handling these applications.
The deadline to apply for Paycheck Protection Program (PPP) forgiveness is 10 months after the end of the covered period — which for most folks for the first round was 24-weeks — so that wouldn’t be until sometime in July 2021 for the earliest borrowers. (It’s not really a deadline, but it’s the date on which the lender will start requiring loan payments, so I think of it as one.)
We’re planning to dedicate May & June 2021 to working through all our existing clients’ PPP forgiveness applications. There are many clarifications we’re still waiting for (they keep dribbling out of Congress, IRS, and the SBA bit by bit, with occasional leaps), and the interaction between the PPP and other types of financial relief is complex.
An example of how the changing rules affect applications: the EIDL advance grant was previously supposed to be subtracted from PPP forgiveness; but by asking our clients to wait on their forgiveness applications, they were able to take advantage of a December 2020 change that removes this requirement, saving them many thousands of dollars. (Though thankfully, it sounds like SBA will eventually refund those amounts to businesses who applied before this new rule went into effect.)
As if these reasons weren’t enough, in a recent on-demand AICPA Town Hall, they mentioned that: – Most lenders are not actively taking forgiveness applications because their teams are focused on administering PPP2. – SBA is working very slowly on forgiveness process because they are also focused on PPP2. – The new simplified form for $150k and under will not be worked into the SBA system until sometime in March.
Between the constantly-changing rules for PPP and the guidance and calculations needed for ERC, we’re still following the recommendation of the AICPA and asking folks to hold off on PPP1 forgiveness applications, until tax season is behind us all and the IRS can focus on the remaining questions, allowing us to be methodical and consistent in our approach.
There’s no reason to be nervous about holding off on forgiveness — of the one-third of PPP loans that have been submitted for forgiveness, fully 99% of the loan dollars have been forgiven. The very small amount that have not are small loans at only 1% interest. Furthermore, by waiting you are giving your business the best chance at maximizing other types of financial relief, especially as the new Biden-Harris administration is in the process of changing rules to make them more attainable for a larger number of the smallest businesses out there, as well as Congress creating new funding opportunities.
(For tips on planning for the potential Employee Retention Credit, see my next blog post.)
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
A slide from this morning’s CPA Loan Portal-AICPA update.
Big changes yet again in the world of the Paycheck Protection Program (PPP), where it sometimes seems the only constant is change.
The White House released a Fact Sheet early yesterday indicating immediate changes to the program intended to shift focus to small businesses with few or no employees, and increase program access to those who may otherwise have been shut out.
The five main changes, as summarized in the CPA Loan Portal-AICPA slide above (from this morning’s webinar), are in two different areas — “Focusing On Small Businesses” and “Increasing Program Access”, and are as follows:
Starting Wednesday, a temporary pause in applications for 20+ employee businesses.
New eligibility calculation rules for Schedule C self-employed (see below).
Borrowers with non-fraud convictions will no longer be prevented from applying.
Student loan delinquency will no longer prevent borrowers from applying.
Clarify that ITIN applications for non-citizens will be accepted.
The biggest take-away for our client base is #2 above — this particular section of the White House statement:
Help sole proprietors, independent contractors, and self-employed individuals receive more financial support. These types of businesses, which include home repair contractors, beauticians, and small independent retailers, make up a significant majority of all businesses. Of these businesses, those without employees are 70 percent owned by women and people of color. Yet many are structurally excluded from the PPP or were approved for as little as $1 because of how PPP loans are calculated. To address this problem, the Biden-Harris administration will revise the loan calculation formula for these applicants so that it offers more relief, and establish a $1 billion set aside for businesses in this category without employees located in low- and moderate-income (LMI) areas.
The SBA followed up with their own release shortly afterwards, stating, “The 14-day exclusivity period will start on Wednesday, February 24, 2021 at 9 am, while the other four changes will be implemented by the first week of March. The SBA is working on the program changes and will communicate details throughout this week.”
What does this mean for applicants and their advisors?
PPP loans are based on wages to employees, which are subject to “payroll tax” (or “Social Security & Medicare taxes”). Whereas for certain types of one-person companies that don’t have payroll, the amount is calculated based on the net profit from IRS 1040 Schedule C — the amount on which “self-employment tax” is paid (also known as “Social Security & Medicare taxes”).
As CNBC reports, because of this method of defining “payroll” for the self-employed, some applicants saw very low loan amounts in previous rounds of the program, because they make very little in profit.
To “fix” the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will calculate loan amounts from gross income instead of net profit.
This means that millions of small business owners who posted a loss in 2019 or 2020 will still be able to apply for PPP funds, based on their revenues before deductions are taken.
This sounds wonderful — and to some extent is — but it’s inherently unfair to partnership owners, who also have their PPP loans based on self-employment income. It’s also unfair to the millions of Schedule C filers who already applied for both rounds of the PPP without the benefit of this changed rule.
In a Forbes article from yesterday afternoon, Brian Thompson pointed out, “even more important is the question of whether this formula will be retroactive for those sole proprietors who have already applied. We don’t know yet whether these businesses will be allowed to gross up based on the new formula.”
As for small business advisors, it puts us back in a sprint again, during an already-grueling tax season. This morning, we developed our plan internally for next steps, which is to identify:
1) Clients who file Schedule C; 2) Who have not filed for PPP; 3) Because they have a loss or very low income on Line 31 of their 2019 Schedule C.
Then we’ll reach out to each one of them to explain that they may in fact be eligible for PPP after all, and to offer to prepare their application through our CPA Loan Portal, as we’ve been doing since early January for all our clients who qualify.
Although I am extremely grateful for this opportunity for small business owners, the inequity of the situation is extremely upsetting; we will see if additional changes are made that allow partnerships and prior applicants to use the same rules. But even if those concessions are made, there is an inherent issue with using gross revenues rather than net — which is that other types of single-member companies (S-corps, C-corps, Non-profits and Co-operatives) did not have the same option, and I know quite a few that suffered from lack of PPP funding as a result; even harder-hit were newer companies that did not show a 25% decrease from 2019 to 2020. (It’s hard not to go up from zero.)
I could go on, but I won’t, because it’s tax season and I have to take care of client deliverables in the midst of it all. Who knew that client financial relief would be such a moving target?
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
This past Wednesday, February 17th 2021, I was honored once again to participate in State Representative Will Guzzardi’s FREE Facebook Live series designed to help his constituents — and anyone else who wants to tune in — to learn about financial relief during Covid-19.
The full-length webinar is FREE, as are the slides, resources and links to walk you through the application process. Additionally, a PDF version of the slides is available for download here:
We covered the following topics: 1) Paycheck Protection Program Summary 2) Current Program Overview 3) Eligibility 4) How To Apply 5) Where To Apply 6) Forgiveness Basics 7) Resources & Questions
Please share far and wide to help small business owners learn about the current status of the Paycheck Protection Program and how they can determine eligibility and apply for a non-taxable forgivable loan to help their companies stay afloat during these challenging times.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
This year, along with the usual year-end forms we ask clients to submit so we can prepare their taxes, we are also asking them to provide Notice 1444 & 1444-B — respectively, the letters that arrived with each of the two stimulus payments (or if direct deposited, around the same time).
However, because these Notices didn’t look like official tax documents, but rather letters from the White House, many taxpayers didn’t read or retain them. The letters contained this information:
The amount of the payment
A phone number to call with issues
Where to find information about the payment on irs.gov
How the payment was made i.e. direct deposit, check, or debit card
Because the IRS does not have the resources this year to create an online “lookup tool” the way they did the last time the government issued stimulus checks — their “Get My Payment” system simply states whether or not a payment was received, and not the amount — then as tax preparers we need the Notice 1444/1444-B to know whether the full amount was issued, or a lesser amount.
Why would this matter? If a taxpayer did not receive the full amount, then they are entitled to recoup the difference on their 2020 tax return.
(But don’t worry: if you received too much, you don’t have to pay it back — unless it was obtained fraudulently.)
After attending numerous year-end tax update courses, we’ve come to the conclusion that the best solution to the missing stimulus payment letter is to have clients download their own 2020 Account Transcript. It’s free, reasonably easy, and reliable.
Keep in mind that Steps 2-9 are one-time only, to register for an account. Once you have a login and password, you can easily access the site anytime you need a transcript.
3. Click “Continue” to register for an account. Once you’ve done this, you should save your login information so you can use it every time you need to order a transcript of any type (for example, a transcript of your most recent tax return).
4. You will need to provide various types of information to validate your identity. Click “Continue” or “Yes” for the next few screens, until you reach the “Let’s Get Started” page.
5. Enter the required information, click “Send Code”, and then check your email for the code and enter it on the following screen.
6. Enter the required information exactly as it appears on your tax return (SSN, date of birth, street address and zip code), then click “Continue”.
When entering the information into the IRS address matching system note the following:
Refer to your most recent tax return and enter the address exactly as it is on your return; for example, spelling out the word “Street” rather than using the abbreviation “St” could be enough to cause an error.
However, addresses in the IRS system are sometimes auto-corrected through a postal-address validation program and frustratingly, may not match what you put on your tax return. If you are having problems getting the address to match, try running your address through the USPS and trying the auto-corrected version.
7. To validate your identity, the IRS will need an account number from one of your financial accounts. You are able to use any of the following: a) Credit Card Number (your credit card will NOT be charged); b) Auto Loan Account Number; c) Mortgage or Home Equity Loan Account Number; or, d) Home Equity Line or Credit Account Number.
(If you do not have one of these, the system will not work for you and you’ll have to request a transcript by mail. And given Covid-19 wait times, that could take months, sadly. Don’t get me started on how inequitable this is.)
8. Enter your Mobile phone number and an Activation Code will be sent to you. Enter your code on the screen and click “Continue”.
9. Create a User Name and Password and Login.
Now you have an account! The rest is easy.
10. Once you’re in the system, you’ll need to select the reason you need a transcript.
In this case, you would select “Other”.
11. Leave the Customer File Number blank and click “Go”.
12. The screen will display all four types of transcript options and the available years.
13. Select “2020” under “Account Transcript”.
Make sure you are selecting the right kind of transcript. (Click here for information on what each of the types of transcripts are.)
And like magic, a pdf pops up in a new tab of your browser with a letter from the IRS — and if you scroll down to the bottom, there’s section detailing all the transactions you need.
The two rounds of stimulus payments will have these codes:
At this point, print the file to pdf and save somewhere safe, along with the rest of your tax season documents.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Just a confirmation that both the IRS and the Illinois Department of Revenue have delayed the start of tax filing season to the same date — February 12, 2021.
The IRS announced January 15th that they will begin accepting and processing 2020 tax year returns later than usual.
The February 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the December 27 tax law changes that provided a second round of Economic Impact Payments and other benefits. This programming work is critical to ensuring IRS systems run smoothly. If filing season were opened without the correct programming in place, then there could be a delay in issuing refunds to taxpayers. These changes ensure that eligible people will receive any remaining stimulus money as a Recovery Rebate Credit when they file their 2020 tax return.
On January 26th, the Illinois Department of Revenue (IDOR) announced that it will begin accepting 2020 state individual income tax returns on the same date that the Internal Revenue Service (IRS) begins accepting federal individual income tax returns, Friday, February 12th.
To speed refunds during the pandemic, both the IRS and IDOR urge taxpayers to file electronically with direct deposit. Due to limited staffing at both agencies, paper filings are taking many months to be processed. If you have a balance due, be sure to pay it online to avoid issues with paper checks sitting unopened in the mailroom.
As for whether tax season will be extended, the current answer from both agencies is: no. But IRS Commissioner Rettig did mention recently that a third round of stimulus checks might make hitting the April 15th deadline impossible. We shall see — tax professionals are mixed about the idea.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
As is the case every year, we’re hearing from lots of folks confused about when to send a 1099 form or other “information returns” to someone. It is true that over time, these forms have continued to change, and the rules have become more specific… but the basics remain the same. The most important point is that only businesses need to issue 1099s — if you paid someone for personal purposes, you are not (yet) required to send them or the IRS a Form 1099.
Here’s a crash course for each type of form, followed by an FAQ.
1099-NEC This form was new for 2020 and replaces the old Box 7 of Form 1099-MISC. “NEC” stands for “non-employee compensation”. It is due to recipients and the IRS by January 31st (or the first business day after that, if 1/31 falls on a weekend).
If you paid: 1) a NON-corporation (*see below); 2) for services (not products); 3) via check, cash, ACH, or wire transfer — but not merchant services or electronic payments (such as credit & debit cards, PayPal Business, Venmo Business (**see below) — and starting in 2022 Zelle/QuickPay, CashApp, personal Venmo & PayPal); 4) $600 or more in a calendar year; then you need to send them a 1099-NEC.
(*) A lot of folks get confused and think the rule is if you paid an “individual,” but really the rule is a “non-corporation,” which means that partnerships and LLCs are included. Just because they have a business name doesn’t mean they’re incorporated. You cannot depend on the company’s name to determine corporate status, nor can you rely on the state LLC/Corp database, as it only indicates the entity type at the state level — almost any type of entity may elect corporate status with the IRS.
So, keep in mind that a company can be an LLC but be taxed as a corporation. In this case, you would not need to send them a 1099, because in the eyes of the IRS, they are incorporated. Here’s an example of a W-9 showing an LLC that is taxed as an S-Corp:
This is one of many reasons you should collect Form W-9 from all service vendors before giving them their first check, just to be safe. The person filling out the W-9 will indicate their entity type and whether or not they are taxed as a corporation.
There’s also an exception to the incorporation rule for attorneys and law firms. You must issue a 1099 to a lawyer or law firm regardless of whether they are incorporated. (Law firms and attorneys have so many specialized 1099 issues, they get their own blog post.)
(**) There’s a lot of confusion over Venmo and PayPal, because there are personal-use “Friends & Family” versions as well as business versions of both platforms. Legally, no business should be using the non-business versions of these payment types… but in real life, many do. It’s very hard to distinguish which payments were made using which method — in theory, a 1099-NEC would need to be issued to a vendor who was paid via a personal Venmo or PayPal method, but I’m not sure how this would be tracked. My recommendation (for many reasons) is to only use the business versions, and then the 1099-NEC is a non-issue (because Venmo and PayPal will issue a 1099-K instead). It also sounds like, starting in 2022, even the personal versions of these programs will be required to issue a 1099-K if $600 and over.
I know, that’s all very confusing. Here’s a nice decision-tree provided by our friends over at Bookkeepers.com, courtesy of Bookkeeping Buds.
1099-MISC
Items such as rent payments, royalties, attorney settlements (as mentioned above, not payments for legal services), and medical healthcare payments will still be reported on Form 1099-MISC, though the form has been redesigned and the boxes renumbered.
Report prizes and awards of $600 or more that are not for services performed in Box 3. Include the fair market value of merchandise won. And be careful here, as it is easy to accidentally include these on Form 1099-NEC if the recipient also provided unrelated services.
Rent paid ($600 or more) (Box 1)
Royalties paid of at least $10 or more (Box 2)
Prizes and awards and certain other payments ($600 or more, see instructions for Form 1099-MISC, Box 3 for more information)
Backup withholding or federal income tax withheld (any amount) (Box 4)
Amounts paid specifically to physicians, physicians’ corporations, or other suppliers of health and medical services ($600 or more) (Box 6)
Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (Box 7)
Gross proceeds paid to an attorney ($600 or more whether or not incorporated) (Box 10) – “made to an attorney in the course of your trade or business in connection with legal services, but not for the attorney’s services”; for example, a settlement agreement.
The deadline for providing this form to recipients is the same as above, January 31st. However, the deadline for filing 1099-MISC with the IRS is February 28 if filing on paper, and March 31 if filing electronically.
1099-K
It’s unlikely that anyone reading this will be in the position of issuing Form 1099-K to vendors — but you should know about this form, for a few reasons: 1) You are likely to receive one. 2) It’s the reason you don’t have to issue 1099-NEC to anyone you pay via credit card/debit card, Zelle, QuickPay, a business PayPal account, or a business Venmo account. 3) You may need to reconcile this form against the amount of sales income you report on your tax return.
Form 1099-K is for payments made in settlement of “reportable payment transactions”, which is any credit card, payment card or third-party network transaction. So if you receive payments in this way (unless you only accept checks, e-checks, ACH, or zelle/QuickPay, you probably do), then you’ll get a 1099-K for this total.
But because these amounts are reported to the IRS for you, you don’t need to issue 1099-NEC or 1099-MISC forms to vendors whom you paid using one of these methods. In that case, the recipient could end up having the same income reported to the IRS twice.
As a bookkeeper, accountant or tax preparer, it’s important to protect your small business clients by making sure all taxable income is being reported on their books/returns. If the 1099-K is for an amount that is lower than what’s on the income section of the Profit & Loss, it’s not likely to be an issue. But if it’s higher, you’ll need to do a reconciliation to show that the difference was due to non-taxable receipts such as sales taxes collected, tips collected, refunded sales, and the like.
1099-INT
This form is issued to anyone who lent your business money, and your business paid them at least $10 of interest in the past calendar year. It includes owners, partners, and shareholders.
Note: do not issue this form for accrued interest; it is only for actual payouts of interest in cash or trade.
The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.
If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.
Another note: I have had clients reach out confused by the language “You are not required to file Form 1099-INT for interest on an obligation issued by an individual”. This means if the loan were TO an individual rather than FROM one, and the individual paid interest to the company. (This is not usually the case.) In that situation, the individual would not have to issue the company a 1099-INT (although the company would still have to declare the interest income).
1099-DIV
This form is issued to a shareholder of a C-Corporation for dividends or other distributions paid in the past calendar year.
Most folks don’t think this applies to them — but if you own a business that is taxed as a C-Corp, and you took money out that wasn’t W-2 or loan repayments, then you may have issued yourself dividends. (And if it was for a loan repayment, did you pay the required amount of interest? If so, see the “1099-INT” section above.)
The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.
If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.
1098
This form is to report mortgage interest and real estate taxes. You may not think it applies to you, but if you do the bookkeeping for or are a member of a housing cooperative, you may find that it does. This needs to be issued to housing co-op members for their allocated portion of mortgage interest and real estate taxes paid by the cooperative, so they can deduct them on their personal tax return, Form 1040, Schedule A. If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.
Frequently Asked Questions
What do I do if the vendor will not give me their Tax ID Number, which I need to file the 1099?
First off, it’s the business’ responsibility to obtain this number. That’s why I recommend getting the W-9 from the vendor before giving them their first payment. But in the case where it’s 1099-time and you still don’t have that TIN for some reason, respectfully let the vendor know that not having their info will not prevent you from filing the 1099. It just means the IRS will receive it with “REFUSED” written in the field where the number should be (or if you use an e-filing program, you will check the box that the number is unavailable). This will almost always trigger an audit for both the business and the recipient, which no one wants. Presented with this information, I find that most non-compliant vendors are suddenly able to fill out that W-9 form after all.
Do I really have to send one to my landlord? They get angry when I bring it up.
If your landlord is not incorporated, yes, you do. If it makes them mad, then consider why… are they trying to avoid declaring it as taxable income? Is that the type of person you want to rent from?
What if you forgot to issue a 1099 to someone?
It’s never too late! Since the statute of limitations never starts if you don’t file a return, penalties and interest can continue to accrue forever. If you noticed that you forgot to file a 1099, even for a prior year, reach out to the recipient in question and make sure they declared and paid taxes on the income you inadvertently forgot to remind them about — and hopefully they have. In this case, no amended return will be required on their end, and the form’s arrival will not come as an unwelcome surprise. If not, then that’s a bigger concern. It is the responsibility of each recipient of income to declare it on their return, regardless of having received the 1099. Not getting the form does not exempt a taxpayer from declaring the income they earned. So, the business owner needs to evaluate the risk involved to their company in knowingly refusing to comply with tax law, versus the recipient’s desire to evade taxes.
What do you do if you receive a 1099 that is incorrect or unnecessary?
If you receive a 1099 that has incorrect information on it, simply reach out to the issuer to ask for a corrected 1099. Do this as soon as possible, as it will help them to fix it before it is submitted to the IRS.
If they will not correct the total, then declare the full amount on your tax return, but “back out” the incorrect amount as a negative, with an explanation to the IRS for why this amount was inaccurate. If you receive an audit notice, provide the IRS with the documentation showing why your calculation is correct, and the support showing you reached out to the issuer when you realized the form was not right.
If you should not have received a 1099 at all, follow the same advice as above. A good example of this would be if you received a 1099-K for credit card payments, but also received a 1099-NEC from the company that paid you (this is quite common… it is extremely challenging in most bookkeeping software to distinguish how a bill was paid in most reports). In this case, if the customer will not void the 1099 form for some reason, simply declare the full amount on your business’ tax return and “back out” the amount that was double-issued, with the explanation that it was already declared in income via 1099-K or some similar wording.
However, if the reason you should not have received the 1099 was that you are taxed as a corporation, and you’ve already declared this income on your tax return, then you can ignore the form — it will have no effect on anything and was just a waste of time on the part of the issuer.
How do I run the 1099 report in QuickBooks? Won’t it tell me who needs a form from my company?
Most bookkeeping professionals don’t use the 1099 report that QuickBooks generates — it’s too prone to user error when setting up the vendors, accounts, and dollar-thresholds. Instead we run the detail of the cash accounts and filter by transaction type – Check, Expense, Bill Payment… then sort by Name. The problem may be that there is not a name in there, or it is not a Vendor Name: another great reason to make sure you’re setting up bank rules and being careful about data entry to include vendor information on all transactions.
How does PayPal work?
Oh my goodness, is this ever complicated.
If you pay a business using your personal bank or Paypal account, or pay through “Friends & Family” PayPal you do need to send a 1099 (if over $600), because PayPal thinks this was a personal transaction — because, as I mentioned at the top of this post, personal transactions do not require 1099 forms. If you had used “Business” PayPal, then PayPal would send the 1099-K and there would be no reason to issue a 1099-NEC.
A colleague of mine recently called PayPal support about this and here was their response: If the transaction detail says “money sent”, those qualify as Friends & Family transactions. However, if the transaction says “invoice paid” or “payment”, then it is a business payment — even if it’s within a personal Paypal account.
What about Venmo?
According to Venmo’s term of service, using it for business is a violation, and they can seize whatever money you have sitting in your Venmo account if they catch you using it for business.
However, we know sometimes this is the best way to collect money from folks, or that customers will send you Venmo funds without thinking about it, or that you’ll do the same with your vendors.
Venmo is considered a “peer-to-peer transfer service”, and not a third-party network. Therefore, treat these like cash payments from a business and send a 1099 form to your vendor.
(Side note: Venmo is starting to accept applications from a number of businesses for a new “Business Venmo”, but it’s brand new and very limited. Be careful with this. The problem with Venmo, PayPal, Bento, and other similar companies like that is that they don’t act like they’re banks — and their staff doesn’t realize that banking is actually the primary function of the company they work for — they don’t get the same kind of intensive training that bankers do. I recommend avoiding Venmo for business payments as much as possible.)
The short version here is that not all states have the same rules. Some allow the IRS filing of certain information returns to substitute for state filing requirements, and some don’t. Some require e-filing and some allow physical mailings. In past years, the IRS offered state-filings with the 1099-MISC, but didn’t bring that into the modern era when they released 1099-NEC. So please, do your homework when it comes to state filings.
Where can I find more info on due dates, penalties, and real-life scenarios?
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
