Thursday, Jan. 31, is the deadline for businesses to issue tax forms, including W-2s and 1099s, for work performed in 2012. Missing that deadline, or issuing improper documents, used to draw the equivalent of a wrist slap from the IRS. But in the past couple of years, many penalties—including those on small businesses—have more than doubled, and deadlines are being strictly enforced.
For an update on the rules, and on the 1099-K reporting requirement that became effective a year ago, I checked in with Janice Krieger, an expert on W-2 and 1099 compliance at Greatland, a Grand Rapids (Mich.) tax documents and e-filing company with 250,000 small and midsize business clients. Edited excerpts of our conversation follow
What tax forms do small employers and self-employed individuals need to be aware of by the Jan. 31 deadline?
If your business hired freelancers or subcontractors in 2012, and you paid them more than $600 in total during the year, you have to issue them a 1099-MISC. So if you hired a company to paint your office, and you paid them more than $600, you have to send them a 1099-MISC. If you’re an employer—of any size—you have to issue W-2s to all your employees, also by Jan. 31.
There are later deadlines for filing both those documents with the federal agencies and in some cases, with the states, depending on where your company is located.
Are paper copies of these forms still the norm, or are more companies issuing statements electronically?
There is a trend toward electronic delivery, but you have to have your employees’ consent. They have to show that they have the ability to retrieve those documents electronically, for instance, if they are going to be posted to a website for download.
What happens if you miss the deadline?
There are extension options. If you fill out IRS Form 8809, you’re automatically granted a 30-day filing extension for both W-2s and 1099s. However, that extension only applies to filing these documents with federal agencies, not sending them to your employees or subcontractors. The standard deadlines, if you’re going to file them on paper, give you until Feb. 28 to file with the feds; the deadline is April 1 if you’re filing electronically. If you get the extension, you have another 30 days on those deadlines, but not on getting the information out to your employees and subcontractors.
Congress toughened the penalties in 2011 and indexed them for inflation, so they’ll increase every five years. What are the monetary penalties for noncompliance now?
For small businesses, which are defined as having $5 million or less in annual gross receipts for the three most recent tax years, the maximum failure-to-file penalty is $500,000, up from $100,000 before 2011. That’s if you do not file these documents at all, or you file after Aug. 1. The maximum penalty for organizations that file incorrect statements but issue corrections within 30 days is $75,000. If you issue corrections more than 30 days past the deadline but before Aug. 1, the maximum penalty is $200,000.
There was a penalty structure in place before, but the penalties got quite a bit pricier. The first penalties under the new rules started to be levied in mid-2012, so companies that got hit with them are feeling the pain now.
For tax year 2011, credit-card and online payment providers were required to issue Form 1099-K, which documented all the transactions they processed for individuals who did more than 200 transactions and $20,000 in annual gross receipts. This was aimed at online sellers, to make sure their electronic payments are properly counted as income. Is that process in place for tax year 2012 and beyond?
Yes, that requirement will continue. It’s a way for the IRS to monitor income and close the tax gap. The latest estimate of the net tax gap is $385 billion, and we know that there’s very little nonreporting of wages and salaries that are listed on W-2s. But the misreporting is estimated at 56 percent for income that is subject to little or no information reporting. That’s why the 1099-K was required, to bring about more compliance.
What should individuals receiving 1099-K forms do with them?
They should be used to report that income on your tax returns, depending on what type of business you are running. The IRS compares the amount you report as income with the amount reported on your 1099-Ks. So if you had payment-card transactions of $100,000 according to the payment companies, but you reported only $80,000 as business income, that’s going to be a red flag for the IRS to check and see if you are underreporting income.
The 1099-K reports gross income, not net income, which would include such things as chargebacks and transaction fees, right?
Right, so you as a business owner must document all those expenses and make sure you list them on your tax return, so you are paying taxes on the proper amount of income.