Tax News E-Alert

Volume 3, Issue 1, January, 2010

REPORTING REQUIREMENTS FOR INDEPENDENT CONTRACTORS

Businesses that use the services of independent contractors will have annual federal and California reporting requirements related to the amounts they have paid for those services.

 Federal Form 1099

 Forms 1099 for the 2009 tax year are due to recipients by February 1, 2010; the forms must be filed with the Internal Revenue Service by March 1, 2010.  The IRS forwards information reported on paper returns to the Franchise Tax Board.

 Following is a brief summary of reporting requirements for the 1099-INT and 1099-MISC.

®  1099-INT – Interest Income:  Report amounts of $10 or more, with some exceptions ($600 or more paid in the course of ones trade or business, under certain circumstances).

®  1099-MISC – Miscellaneous Income:  Payments that are made in the course of your trade or business.

• Rent or royalty payments; prizes or awards that are not for services, such as winnings on TV or radio shows.  Report amounts of $10 or more for royalties; report amounts of $600 or more for all others.

• Payments for services performed for a trade or business by people not treated as its employees.  This includes, for example, amounts paid to subcontractors for auto expenses and mileage, fees, compensation, and bonuses; fees paid to directors; amounts paid for damages; and golden parachute payments.  Report amounts of $600 or more.

• Payments of any amount for which you withheld any federal income tax under the backup withholding rules. 

• Gross proceeds paid to attorneys.  Report amounts of $600 or more.

In general, you are not required to report payments to corporations.  However, you must report payments to corporations for barter exchange transactions, acquisitions or abandonments of secured property, cancellation of debt, or payments of attorneys’ fees and gross proceeds paid to attorneys.

There may be serious consequences for failure to file Forms 1099 or for incorrectly reporting the information on the forms.  A taxpayer who, without reasonable cause, fails to timely file required Forms 1099, fails to include of the information required, or includes incorrect information is subject to a penalty of $50 for each return, up to a $250,000 calendar year maximum.  The penalty is increased to at least $100 per return with no calendar year maximum if the failure is due to intentional disregard.  Failure to report on a Form 1099 amounts paid as remuneration for personal services rendered may also result in the disallowance of the deduction for California purposes.

You may download an informational copy of Form 1099 at the Internal Revenue Service web site, http://www.irs.gov/.  The filing copies of the 1099 must be prepared on preprinted ("pink") forms.  If you are required to file 250 or more information returns, you must file electronically; this requirement applies separately to each type of form.

California Form 542

If you are required to file a federal Form 1099-MISC for services performed by an independent contractor, you may also be required to report specific information to the California Employment Development Department (“EDD”) about the independent contractor on Form DE 542 (Report of Independent Contractors).  The annual reporting requirement applies to you if the independent contractor is an individual (not a partnership, a corporation, or an LLC) who is not your employee and who receives compensation or executes a contract for services performed for you either in or outside of California.    

 You must report to the EDD within twenty (20) days of either making payments totaling $600 or more or entering into a contract for $600 or more (whichever is earlier) with an independent contractor in any calendar year.  The report cannot be filed in conjunction with federal Form 1099-MISC; it must be submitted on Form DE 542 within the required twenty-day period.  The EDD may assess penalties for failure to comply within the required time frame.

There are several ways you may obtain forms and information from the EDD:  their web site at http://www.edd.ca.gov, any of their offices that are located throughout California, or their hotline at (916) 657-0529.

Federal Form W-9

The Internal Revenue Service requires businesses to have a federal Form W-9 (Request for Taxpayer Identification Number and Certification) on file for each of their independent contractors at the time they pay for the services, or they must begin backup withholding. The purpose of the W-9 is to obtain a taxpayer identification number, to request certain certifications and claims for exemption from withholding, and/or to overcome the presumption of foreign status.  We recommend that you obtain a completed W-9 from any new independent contractor before you pay him/her for services rendered or, if applicable, at the time you enter into a contract.  If you are currently a recipient of services provided by independent contractors and have not already done so, have each of them complete a W-9 for your files as soon as possible.  You may also want to consider confirming that the W-9 information you obtained from your independent contractors in prior years is current.  An independent contractor who is an individual may have a federal tax identification number for his/her sole proprietorship; be sure that you also have the social security number for California purposes.  You may download the W-9 forms and instructions from the Internal Revenue Service web site, or order forms and instructions by calling the IRS at (800) 829-3676. 

Please call us at (310) 697-1500 if you need assistance in preparing either the federal Forms 1099 or California Forms DE 542.

If you need specific information regarding your personal or business taxes, please feel free to contact me at 310-697-1504 or mstclair@rwac.com.

Best regards,

Margi St. Clair

Richard Welling & Co., LLP

3625 Del Amo Blvd., Suite 290

Torrance, CA 90503

(310) 697-1500

www.rwac.com

Be advised that this information was not intended or written to be used, and cannot be used, for the purposes of avoiding tax-related penalties; or for promoting, marketing, or recommending to another party any tax-related matters addressed herein.  This newsletter is written in general terms and is not intended to be a substitute for specific advice regarding tax, legal, accounting, investment planning, or other matters.  Do not use the information in this newsletter in place of personalized professional assistance.  If you need to discuss any issues found in this newsletter, give us a call. 

This publication is designed to provide accurate and authoritative information and is distributed with the understanding that legal, tax, accounting, and financial planning issues have been checked with resources believed to be reliable. Some material may be affected by changes in law or in the interpretation of such laws. Do not use the information in this article in place of personalized professional assistance. If you need to discuss any issues found in this article, give us a call. Copyright 2009