How to Avoid Compliance Penalties When Paying Independent Contractors – Five Tips

Published: February 9, 2012

by Anita Dudley | Manager, Tax Services Group

The American Payroll Association (APA) has issued a press release that describes five basic tips on how to avoid IRS penalties when paying independent contractors.

Background. With limited exceptions, every person, corporate or otherwise, engaged in a trade or business who, in the course of that business, makes payments aggregating $600 or more to another person (e.g., an independent contractor) in a calendar year must file an information return (Form 1099-MISC) setting forth the payee’s name and address and the amount paid, and furnish a statement to the payee. Reportable payments are: rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, prizes or awards (that aren’t for services rendered), or other fixed or determinable gains, profits and income. (Code Sec. 6041)

APA’s tips for employers are as follows:

(1) Form 1099-MISC is required for noncorporate service providers. Employers must provide a Form 1099-MISC, Miscellaneous Income, by Jan. 31, 2012, to any noncorporate service provider who was paid at least $600 for services during 2011. The Form 1099-MISC does not have to be provided to a corporate service provider. Employers should look at the completed Form W-9, Request for Taxpayer Identification Number and Certification, that they received from the service provider to determine whether the service provider is noncorporate or corporate. Employers must provide Form 1099-MISC to sole proprietorships, partnerships, attorneys, and medical service providers who do business as corporations.

(2) Form 1099-MISC is not required if contractor paid electronically. There is no requirement to send a Form 1099-MISC to any contractor that was paid electronically, such as by credit card, debit card, PayPal, or gift card. The bank or credit card company that made the actual payment to the contractor will send the contractor Form 1099-K, Merchant Card and Third Party Network Payments.

(3) The pilot program for truncation of TIN numbers has been extended. The IRS pilot program that allows for the truncation of taxpayer identification numbers (TINs) on 1099 forms has been extended to include 1099s through the 2012 calendar year (filed in 2013). This means that the first five digits of the TIN can be replaced with asterisks or Xs on the payees’ paper copies of Form 1099, but copies filed with IRS must have their full TIN.

(4) Better safe than sorry. The APA advises employers who are unsure whether a Form 1099-MISC is required to go ahead and send one. Employers can’t go wrong by sending more 1099s than are required, but could be subject to penalties if they do not send all qualified service providers their Form 1099-MISC.

(5) File forms on time. Paper copies of Forms 1099-MISC must be mailed to the IRS no later than Feb. 28, 2012. Forms 1099-MISC filed electronically must be submitted to the IRS by April 2, 2012.
The deadline for filing paper copies of Forms 1099-MISC with the IRS is not extended to February 29 during leap years. The deadline is extended to February 29 for paper copies of W-2 forms submitted to the Social Security Administration.