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MY CPA’s Summary
In a recent audit, an IRS agent informed me [Bruce Bialosky, my CPA] his bosses were focused on 1099s and whether they were filed and whether the people receiving them were independent contractors or actually employees. They have had a multi-point test to determine whether people qualify as independent contractors. As of today, California has abandoned that multi-point criteria for a more restrictive
In a California Supreme Court ruling, the presumption is that everyone is an employee. The hiring entity can be exempt from treating the person as an employee if they met this three-point test:
1) Is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
2) performs work that is outside the usual course of the hiring entity’s business; and
3) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
This is much stricter criteria than the federal criteria. Since the government of California is constantly money-grubbing, I would see them actively going after businesses. Remember, there are potentially penalties — possibly severe — for non-compliance. Also, remember if you have questions regarding these matters you must consult an attorney because CPAs providing advice are subject to the same penalties as their clients. Attorneys are exempt from the penalties because — you guessed it — they write the laws.
My CPA’s Summary
AB 5. The bill, which became law on January 1, 2020, codified and expanded a California Supreme Court ruling dictating that virtually anyone working for your company except specifically excluded professions is a W-2 employee. These employees include ever-escalating minimum wages, egregious unemployment and worker compensation costs. The California state government continues to intensify their micromanaging of California businesses. Read more
1099’s are used by federal and state governments as third-party verification of income needed to be recognized by the recipient. Clients ask all the time whether they need to recognize the income if they do not receive a 1099. The answer is Yes. The government just uses the 1099’s to keep you honest There can be severe penalties for not filing required 1099’s. Recently a client was audited by the state of California. Though they did file 1099’s, they did not file all the ones required. The state assessed them over $6,000 (10% of the amount that was to appear on the 1099’s). The federal government also has a penalty.
So here is a primer on the requirements:
The IRS has begun focusing heavily on taxpayer compliance with information reporting laws. Generally any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions during the calendar year, must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income. To properly report the information required on Form 1099, you need to have the provider’s taxpayer identification number (TIN). We suggest you request that the provider fill out and give you a Form W-9, (Request for Taxpayer Identification Number and Certification), before work is done or payments are made. If a provider does not supply you with a taxpayer identification number, you are generally required to “backup withhold” 28 percent from any “reportable payments.” You must file Form 1099-MISC, Miscellaneous Income, for each person to whom you paid during the year: At least $600 in rents, services (including parts and materials), and other income payments. You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business. Personal payments are not reportable. Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which you are not required to file a Form 1099-MISC include:
(1) generally payments to a corporation; (Payments for Attorney Fees must be reported on form 1099 whether or not the attorney is incorporated)
(2) payments for merchandise, telegrams, telephone, freight, storage, and similar items;
(3) wages paid to employees (these must be reported on Form W-2, Wage and Tax Statement);
If you fail to provide Form 1099 and cannot show reasonable cause for the failure, you may be subject to a penalty. The penalty applies if you fail to provide the statement by the deadline, fail to include all information required to be shown on the statement, or include incorrect information on the statement. The penalty is up to $260 per individual 1099 not filed on a timely basis. You may also lose the deduction for the payment if you do not file a timely 1099. If you have any questions about how this affects you or your business, please contact me. Though I do not prepare 1099’s, I can get you someone to do such if you have not already done so. They are now due on January 31st to the government.
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