It’s that time of the year again. If you are an individual or business who made reportable transactions during the calendar year, you must file Informational Returns to the Internal Revenue Service (“IRS”) and issue a copy of the return to recipients. The recipients use the Informational Return to prepare their tax returns, and the IRS uses it to match the information from the specified transaction to the tax payer’s return. The deadlines are varied by the type of Informational Returns, but the earliest one falls on January 31st.
If you think the Informational Return has nothing do with you, you are wrong! You probably issued or received at least one or two Informational Returns last year, and you will likely get one this year too. Still don’t think so? How about the individual forms like 1042-S, W-2, 1098-T, 1099- INT, 1099-DIV, 1099-MISC, or 5498?
If you are recipient of these forms, the instructions are pretty simple. However, this is not necessarily the case of you are an issuer of these forms. Let’s review the requirements using an example.
Say Peter is opening a new retail business in Washington, DC. He hired his old friend in Michigan to do interior design, and paid $3,000 for her creative design service; this friend did her design work from Michigan, for the most part. For the entity set-up procedure, Peter hired an attorney in Virginia, and paid $1,200 for his legal service. Peter also contracted services for his new shop location, like pest control, cleaning, and security. All these services were rendered by individual small businesses in Maryland. Lastly, Peter hired a retired marketing expert in Connecticut to run a marketing campaign for his business. This campaign was run over the internet, and Peter never met his consultant face-to-face, but paid him $1,000 nonetheless.
Peter’s new business may not be up and running yet, but he still has to issue a 1099-Misc form for the payments made to these independent contractors. So, he faithfully followed the IRS instruction as to the payee status, amount threshold, service type, etc. He even called a couple of times to verify their tax ID and address. Peter sent out all the relevant copies to these payees in a timely manner, and finally e-filed the forms with the Internal Revenue Service.
At this point, Peter is quite tired of the whole process, and believes that he’s fulfilled all of his requirements. However, this is not the case. Next week, read what further steps he would be required to take to make sure his Informational Returns are squared away.
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