What are 1099 Forms?
1099 forms are a series of tax forms that document payments made to independent contractors and other self-employed individuals. Since the payments include those made in exchange for services rendered, they are also referred to as information returns as opposed to regular tax reporting returns. The 1099 form prompts any business or individual who paid at least $600 for services to complete the form and send copies to both the recipient and the IRS as well.
The most common form is the 1099-MISC, used to document payments for which other forms, like the W-2, aren’t a good fit . Other 1099 forms are typically referred to by their number, including: 1099-DIV — For dividends and distributions 1099-INT — For interest income 1099-R — For distributions from pensions, annuities, retirement plans, insurance policies, etc. 1099-B — For government payments, bartered exchange payments, broker payments, etc. 1099-G — For government payments and credits The IRS also issues other forms, such as the 1095-A, 1095-B, and 1095-C, to document compliance with ACA health coverage requirements, an example of a targeted purpose form.
When do Law Firms Get 1099 Forms?
Acknowledging that the law of contractor reporting makes little sense, most attorneys want to know how the requirements apply to them and their firms. Lawyers prefer to be educated on the law and then comply – once they understand. For example, most lawyers, though unsure of the technicalities, suspect that as a whole the system is not designed to apply to them or their firms because a concept of professional independence runs throughout their practice. With that in mind, the discussion that follows focuses on when law firms receive 1099s.
When working with the principles of any business legal structure (LLCs and corporations), it has been stated that there is no 1099 reporting of fees paid to a business, once properly formed, simply because of the existence of that business. Even so, when the business is a law firm or legal professional services firm, reporting would be required for any services rendered pursuant to contract if the dollar value exceeds $600 in a year. Therefore, consider the general exception to reporting for partner distributions. As noted above, generally, the rule is that law firms do not receive 1099s for partner distributions. But what about distributions to employees or miscellaneous business income? Those payments are reportable as well if over $600 in a year. Many firms have preferred vendor lists that include these service providers.
Freelance lawyers and contract lawyers should also keep in mind that firms do hire them directly as employers and then receive 1099’s even though the 1099s are issued to the freelancers or contract lawyers. The amounts are also above the $600 threshold. It is also important to note that like other service providers, if those freelance lawyers or contract lawyers work with law firms as employees, firms obtain W-9 forms and provide forms 1099 to those employees.
IRS Rules on Reporting
IRS regulations surrounding reporting income are crucial for law firms to understand. These regulations govern how much income a law firm must report and to whom the firm must issue 1099 Forms.
1099 forms must be filed with IRS anytime a payment of $600 or more is made to unincorporated persons for services provided. This includes:
• payments to independent contractors
• payments to professionals such as accountants and doctors
• payments to attorneys for services provided such as litigation fees, legal advice, etc.
1099 forms must also be filed with the IRS for payments of $10 or more paid to attorneys as a part of a settlement or award.
Unincorporated persons include sole proprietors and individuals who are partners in a partnership or members in an LLC. Payments made to corporations (C-corps and S-corps) do not require a 1099 form to be filed.
So, under the IRS regulations, law firms must issue a 1099 form to themselves for any amount of $10 or higher that they invoice to or receive from their firm for their services and time spent. A 1099 must also be issued to the law firm for any amount of $600 or more that they receive from another attorney or firm for legal services performed.
When receiving a payment that requires a 1099 to be issued, the receiving law firm should ask the payer for their tax identification number. A law firm can issue their tax number themselves or request the payer to sign Form W-9, Request for Taxpayer Identification Number and Certification. In general, a law firm should request a signed Form W-9 from any non-corporation to wish a 1099 might need to be sent in subsequent years.
Why Accurate 1099 Reporting is Important
Given the growing reporting obligations for businesses, there is much pressure to now "get this right" and that includes law firms for whom the IRS is increasingly scrutinizing the completion and filing of accurate 1099 forms. Accordingly, correct 1099 reporting for law firms is just as important as for other businesses, notwithstanding the fact that many lawyers think otherwise. In other words, law firms are not exempt from 1099 reporting requirements (just because most of the time they are the recipients of 1099’s and not the issuers).
Failure to properly issue a 1099 form could lead to penalties to law firms, as well as penalties to their clients who received potentially erroneous 1099 information from their law firm clients, and particularly those in the legal industry. The IRS assesses a penalty of $50 for each information return (such as a 1099) that is not filed or is filed late, and also for incorrect information returns. This penalty was increased by the Protecting Americans from Tax Hikes Act of 2015 ("PATH Act") . Any failure to file a correct information return with the Secretary of the Treasury is nevertheless exempted from penalties if corrected within 30 days of the due date. Correcting a failure to file within 30 days of the due date does not exclude application of any addition to the tax or penalty that would otherwise apply. However, there is an exemption available for reasonable cause. The IRS applied the reasonable cause exception liberally after the recent tax reform legislation, but it’s unlikely they will do so to law firms.
On the other hand, accurate and timely filing of 1099’s can help small business law firms defend themselves against the imposition of penalties for failure to deposit or pay an employee’s withholding (FICA payments), willful failure to collect and remit employment taxes, and even willful failure to file employment tax returns, among other IRS penalties. An accurate and up to date vendor list that is updated continuously during the calendar year is key to avoiding 1099 problems. Taking steps to timely file accurate 1099’s will benefit your existing law practice as well as any RRSP/ART trust(s) you may be required to establish for non-contributing employees.
What Should Law Firms Do?
With the 1099 filing deadline fast approaching, law firms should make an effort to track the status of their 1099’s. Doing some spring cleaning now will prevent a last minute scramble in January. Check the types of payees that need to receive 1099s. Rule #1 is to avoid unnecessary 1099’s. After you have finalized your 1099 recipients, remember to set aside enough time to do due diligence and get the information you need from the recipients and/or consult with your tax professional.
Common Questions
What is the deadline for sending out 1099s?
For services rendered in 2009, the deadline was January 31, 2010. However, if the payment was made by credit card or does not otherwise require a 1099, the deadline is actually March 31, 2010. The deadline to send out 1099s is normally January 31 for payments made in the previous calendar year.
What happens if you miss the deadline?
If you file a 1099 after the deadline, you could be subject to fines or penalties. Fines are $15 per 1099 if corrected no later than 30 days late up to a maximum of $75,000. However, if you file no later than August 1, the penalty increases to $100 per 1099 up to a maximum of $1.5 million. Since the maximum penalties are per calendar year, they are not applied in addition to the penalties for a prior year.
I forgot someone. Can I amend a 1099?
If you forget to send someone a 1099 , you can send a correcting 1099 to that person. However, the IRS will only accept that correction if it’s sent within one year. After that time frame, the IRS will likely disallow corrections to a 1099. In that case, the business should carry on as if that 1099 had been properly completed and sent to the IRS. However, ensure that you properly pay and document all nonemployee compensation going forward in order to prevent additional mistakes in future years.
I disputed the amount of payments with the client, so they didn’t give me a 1099. What do I do?
If a client refuses to give you a 1099 but otherwise issues payment and claims to have the basis for refusing to issue the 1099, you should pay the tax anyway, since the IRS has access to copies of all 1099s through its monitoring program. In fact, it would be wiser to pay taxes on the amount disputed and seek the remainder from the client.