As we come down to the wire for the beginning of busy season, it’s important to review some of the things we may already know, or think we know, about reporting and filing requirements. In response to calls from thousands of mistaken customers, Janice Krueger, CIRS, a subject matter expert at Greatland, has put together a top ten list of myths regarding W-2 and Form 1099 reporting.
- Myth: State 1099 reporting is not required if there is no state tax withheld.
Reality: Check your state’s 1099 filing requirements. Many states still require Form 1099s to be filed even if there is no state tax withheld.
“Basically, states want to track state income,” Krueger said. “Over half of the states that require 1099 reporting require at least one 1099 to be filed regardless of whether state tax was withheld or not.”
- Myth: Copy A of Form 1099 can be printed in black ink and filed to the IRS.
Reality: Copy A of Form 1099 must be printed in red drop-out ink in order to be properly processed by the IRS.
“This addresses the form image itself, not the data,” said Krueger. “The data can be printed in black ink on 1099 forms. Many people think that since Copy A can be in black ink and submitted to the Social Security Administration, it should also be true of the Form 1099 as well. The difference is that 1099s are not submitted to the SSA, they’re submitted to the IRS, and the IRS scanning requires the form to be printed in red drop out ink. When 1099s are run through the scanner it doesn’t recognize the red ink so it drops out,’ and the scanner just recognizes the data and that’s what’s processed by the IRS.”
- Myth: All employers offering coverage under an employer-sponsored group health plan must report the cost of the coverage on the employee’s W-2.
Reality: Until the IRS issues final guidance for this reporting requirement, reporting is not mandatory for those employers who filed fewer than 250 W-2s.
“Employers that offer coverage under group health plans are supposed to report the cost of coverage on the W-2s if they filed more than 250,” said Krueger. “If they do report it, they should report it in Box 12 using Code DD. It’s not taxable, but the purpose of reporting is for informational purposes and to show the employees the value of their health care benefits so they can be more informed customers.”
“When the IRS does issue final guidance for the reporting requirement, any guidance that expands the requirement will apply only to calendar years that start at least six months after the guidance is issued, to allow employers plenty of time to comply with the reporting requirement.”
- Myth: In order to prevent identity theft, the taxpayer identification number (TIN) can be truncated (ex: XXX-XX-1234) on Form W-2.
Reality: TIN truncation only applies to the payee’s identification number on payee statements for Form 1098 series (excluding Form 1098-C), Form 1099 series, and Form 5498 series. Employer Identification Numbers cannot be truncated, although a just-released report from the Information Reporting Program Advisory Committee (IRPAC) recommends that truncation be extended to EINs.
- Myth: If an employer gives a worker freedom to act, the worker should be classified as an independent contractor.
Reality: The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. An individual is an employee if the employer can control what will be done and how it will be done even if the employer gives the employee freedom of action.
This is a grey area, with no bright-line rules. “Any information that provides evidence on the degree of control and independence has to be considered,” said Krueger.
- Myth: Using the combined federal/state 1099 filing program meets all the state’s 1099 filing requirements.
Reality: Not all states participate in the combined federal/state program, and many states that do participate in the program still require 1099s with state withholding to be sent directly to the state.
“The combined federal/state program is set up to allow a filer to send 1099s to the IRS and then the IRS will forward the 1099 information to the applicable state if the state participates in the program,” said Krueger. “Many people think the combined federal/state program meets all state filing requirements. Many times it doesn’t because, first, many states do not participate in the program; second, not all 1099 types are supported by the program; and third, many states still require 1099s with state withholding to be sent directly to the state.”
- Myth: The e-file threshold for state W-2/1099 filing is the same as the federal e-file threshold.
Reality: Each state can set its own e-file threshold.
“Approximately half of the states have a lower e-file threshold than the federal requirement, and some mandate e-filing for W-2 and 1099 reporting regardless of the threshold,” Krueger said.
- Myth: when filing on paper, one Form 1096 can be used for one submission of multiple 1099 form types.
Reality: a separate Form 1096 is required for each 1099 form type being submitted to the IRS on paper. For example, if filing both 1099-INT and 1099-DIV forms two 1096 forms would be required.
“Form 1096 is the transmittal form for paper 1099 submissions,” Krueger explained. “Line 6 on the form instructs the filer to check only one form type being filed.”
- Myth: When filing W-2s and 1099s on paper, a filer is required to use the official forms supplied by the IRS.
Reality: Substitute W-2 and 1099 forms are acceptable for filing as long as they meet the specifications outlined in IRS pubs 1141 and 1179.
- Myth: Payments made to corporations are not reportable on Form 1099-MISC.
Reality: Generally, payments made to corporations are not reportable on Form 1099-MISC; however, there are exceptions. Payments for medical and health care, attorneys’ fees, gross proceeds paid to an attorney, and substitute payments in lieu of dividends or tax-exempt interest must be reported on Form 1099-MISC.
“It’s general true that payments made to corporations are not reported on Form 1099-MISC,” said Krueger. “But in many cases when filers go through the vendor lists, they automatically eliminate any that are corporations. It’s important to review the type of payments being made to a corporation to determine whether a 1099-MISC is required or not.”