Best Practices for 1099s Presented by: Dory Peterson Associate VP Business Services/Controller Reading Area Community College, PA

The Feds Were Inspired! New regulations and heightened enforcement call for a structured methodology to ensure that your institution is in compliance – without taxing already- constrained resources.

Agenda Section 511 regulations 1099-Misc reporting regulations Best Practices Resources for regulations Testing 1099s before printing Whatever else we have time for

Tax Reconciliation Act, Section 511 Effective January 1, 2012 Withholding vs Reporting

Tax Reconciliation Act, Section 511 Withholding Rules

Tax Reconciliation Act, Section 511 Current legislation requiring federal, state and local governments, including public institutions of higher education, to withhold 3 percent from payments for goods and services, Medicare payments, farm payments, and certain grants will become effective January 1, 2012.

Tax Reconciliation Act, Section 511 Section 511 of the Tax Reconciliation Act (P.L ), that was signed on May 17, 2006, was initially set for implementation January 1, 2011 but was delayed one year by the American Recovery and Reinvestment Act (P.L ).

Tax Reconciliation Act, Section 511 The law is intended to reduce the “tax gap” and tax evasion. History: 27,000 defense contractors owed about $3 billion in unpaid taxes as of 9/30/02. How could the government collect these unpaid taxes? Hmmmm. Let’s think.

Tax Reconciliation Act, Section 511 Key points:  Tax withholdings are required on all government payments for products and services made by the federal government, state governments, and local governments with expenditures of $100 million or more

Tax Reconciliation Act, Section 511 Key points (cont’d):  Withholding does not apply to payments under $10,000, however payments cannot be divided into two or more payments to avoid the payment threshold  Payments made under existing contracts are not subject to withholding

Tax Reconciliation Act, Section 511 Key points (cont’d):  The 3% withheld is allocated toward the company or individual’s tax liability  No flow down to subcontractors  Withholding must be taken at the time of sale for credit card payments  Government entities are liable for sending money to the U.S. Treasury

Tax Reconciliation Act, Section 511 The 3% withholding process is parallel to withholding employee salaries and wages. The government withholds funds when the payment is made and the withholding and taxpayer identification is transmitted to the IRS. At the end of the year the vendor is provided a 1099-MISC.

Tax Reconciliation Act, Section 511 New internal procedures will need to be developed to adopt Section 511 and to ensure compliance for governmental entities.

Who is excluded from withholding? Private schools Public schools with expenditures of less than $100 million annually

Where is the law right now? House and Senate legislation are moving slowly through the system. Some are requesting an additional 2-year delay, and some are urging the complete repeal of Section 511. Guesses?: The withholding will go away The reporting will not go away

Reporting on 1099-misc Regardless of Section 511, we are all required to report payments to the Feds via the Misc form To help prepare for the possibility of Section 511 going into effect 1/1/12, the 1099-Misc reporting procedures need to be streamlined This will help smooth the way for new internal procedures which may need to be developed to adopt Section 511 and ensure compliance

Reporting on 1099-misc Misc Regulations

Reporting on 1099-misc Payments to report: Box 6 – medical & health care payments ($600+) *physician or other supplier or provider of medical or health care services, including corporations *includes injections, drugs, dentures *exceptions: pharmacies for rx drugs; tax-exempt or gov’t-run hospitals; payments made under a flexible spending account NB: Athletic departments; health centers may be subject the School to these reporting requirements

Reporting on 1099-misc Payments to report: Box 7 – nonemployee compensation ($600+) Includes fees, commissions, prizes and awards, and other forms of compensation for services Includes parts or materials used to perform the services if they were needed for the service Includes an exchange of services Includes use of an entertainment facility that you treat as compensation to a non-employee Includes taxable fringe benefits for nonemployees Includes payments made to an estate or beneficiary of a deceased employee for accrued wages, vacation pay, and other compensation paid after the date of death

Reporting on 1099-misc Exceptions: Who does NOT get a 1099-misc? (I think they will tighten up on this going forward) Payments to corporations Exception to the exception: attorney fees; LLCs may be corporations or partnerships Payments for merchandise, telephone, freight, storage, and similar items Business travel allowances paid to employees Payments to tax-exempt organizations, which includes most federal, state, or local government offices/agencies Payment card transactions if the payment card organization has assigned a Merchant Category Code indicating no reporting required

Reporting on 1099-misc Other boxes: Box 3: Other Income; includes $600 or more in awards or prizes that are not in exchange for service, or FMV of merchandise won; payments for participation in medical research studies Box 4: Federal Income Tax Withheld (proposed changes underway)

Reporting on 1099-misc In order to know which entities are subject to reporting, and to report them properly, you need the following information: TIN Type of organization Exemption from withholding status You get all of this info from a W-9

Purpose of the W-9 In order to know which entities are subject to reporting, and to report them properly, you need the following information: TIN Type of organization Exemption from withholding status You get all of this info from a W-9

Purpose of the W-9 The W-9 form was updated January 2011 to include more tax classifications The W-8 form is used for foreign entities; the purpose is the same: to provide a certification that the company is/isn’t subject to withholding and/or reporting

The new W-9

Best Practices The most important best practice you can start is to get a W-9 from any new vendor PRIOR to conducting any business transaction, including the placement of an order The second most important best practice you can start is to use the W-9 information to facilitate 1099-misc reporting

Collecting W-9s Train your A/P and Purchasing people, and educate the rest of the College accordingly: All vendors must have a W-9 on file The W-9 is not optional Vendors who refuse to provide a W-9 when requested are subject to a $50 fine per occurrence Vendors who refuse to provide a W-9 are probably trying to evade taxes

What are the potential penalties? Failure to File Correct Information Returns By the Due Date, which includes putting incorrect information in the return: $30 to $250 per return; maximum penalties of $75,000 to $1,500,000, depending on timing, size of the reporting entity, no reasonable cause vs intentional disregard (inconsequential errors or omissions are not considered failures) This is what we tell everybody: the College is subject to up to $300,000 in federal penalties if we don’t file our forms properly; the W-9 helps us to ensure we are in compliance; it is a Federal law

The Accounts Payable W-9 Checklist The name or the business name (such as T/A… or DBA….) matches the name to which the vendor wants us to make remittance payments Tax classification – do they get a 1099? TIN present Is #2 crossed off? – subject to withholding

Best Practices If a vendor sends any notice about changing a name, merging with a company even without a name change, or anything that indicates there is any possibility that there may have been a change in the tax classification or organization structure, a new W-9 is requested – a different EIN requires creation of a new vendor record

Chicken or the egg? If you do not have a TIN from the payee, you are subject to withholding a 28% rate on payments required to be reported in box 7 of the 1099-misc This requires that you get the W-9 before you make any payments, otherwise you don’t know if the vendor will supply the TIN or not

Where to put the info in Datatel? In VEND, we use Misc Codes: “No1099” – means we have a W-9, and the entity does not need to be issued a misc A/P is the repository for all W-9s, they enter the EIN, the MiscCode, and the TaxForm on each vendor record, even if the Purchasing Department creates the vendor record

Best Practices When in doubt about whether an organization should get a 1099-misc, then issue one for all payments Example 1: a vendor furnishes a W-9 indicating they are an LLC, but not specifying if they were a partnership or not – encourage the new form!

Best Practices When in doubt about whether an organization should get a 1099-misc for certain payments, then issue one for all payments Example 2: a vendor supplies materials and labor to repair a piece of equipment (should be reported in box 7), and later in the year just supplies materials, and your maintenance department repairs the equipment (does not have to be reported in box 7)

Best Practices Rationale: There are clear regs that say certain payments are “required to be reported” There is no reg that says “forbidden to be reported”; rather, they say they are not “required” to be reported

Best Practices Run a report monthly during the calendar year to identify vendors without W-9s

Testing 1099s before printing If you enter the tax form “1099-misc” in the VEND form before you make any payments, then all payments will be correctly ID’d as payments that require reporting for that vendor if they total $600+ If you do NOT enter it before…

Testing 1099s before printing …you may be missing payments from the 1099 work file Use your monthly report which identifies those vendors without W-9s, and without any tax forms Test all of those vendors 100% by comparing the MDET to CDJR (sort by vou.ven in this report)

Testing 1099s before printing

Resolve discrepancies item by item, and remember it will be much easier next year if you get the W-9 FIRST, and then put the tax form in the VEND record before you make any cash disbursements

Testing 1099s before printing If you really can’t get the W-9 first, code ALL vendors with the 1099-misc TaxForm on the VEND record, and at the end of the year, you just have to delete those vendors from the 1099 work file. This is easier than changing individual vouchers using TXFM, or changing the workfile using MBOX, both of which methods work.

Resources for Regulations national association of state procurement officials instructions for the requestor of Form W-9 instructions for 1099-misc

Whatever else we have time for Questions?