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Where’s my 1099-MISC?

2014 Form 1099-MISC

This is another common question I get this time of year. First lets start with what is a Form 1099-MISC and who should receive one.

Form 1099-MISC

The form (PDF) reports payments for quite a few different things but most payments fall into a few categories. The most common reasons for issuing are:

  1. Box 1 – Payments of rents, for example rent paid to a landlord for office and retail space
  2. Box 2 – Royalties for writers, mineral rights, etc.
  3. Box 6 – Medical and health care payments
  4. Box 7 – Nonemployee compensation, shows payments made in the course of business to an individual or entity that provides services to a business. For example, a retail store may pay someone to clean their windows on a regular basis. If the total payments for the year equal or exceed $600 then the retailer is supposed to issue a Form 1099-MISC to the window cleaning service.
  5. Box 14 – Gross proceeds paid to an attorney

Who is required to send the form?

If a payment(s) are made in the course of a trade or business and equal or exceed the applicable dollar amount, then the payer (business) must complete a Form 1099-MISC. The payer sends the form to IRS and the recipient of the payment. The payer may also have to send copies to state tax departments. The general threshold is $600 but it is lower for payments to attorneys and for royalties and is $5,000 for direct sales of consumer products (box 9). There are some exceptions: generally payments to corporations and LLCs taxed as corporations are not subject to reporting. However, some payments to corporations are reported – such as those to attorneys and medical payments. The payer needs a Form W-9 on file to prove the entity they paid is a corporation or a LLC taxed as a corporation.

Finally, the question

Where’s your 1099-MISC form? It could be in transit as the form can be sent as late as January 31st and not be late. In addition, payers can ask for an extension from IRS causing a legal delay. The payer could be late sending the forms or just fail to comply with the law. It is also possible, the payer had the wrong address for you and either has not received the form back yet or decided not to find your correct address. Maybe you moved and did not tell the payer of your new address and the mail was not properly forwarded.

What do you do if you do not receive the Form 1099-MISC?

The Internal Revenue Code requires you to keep a set of books and records of all your income and deductions. Not receiving the 1099-MISC is not an excuse for not knowing how much you earned since you are required to track it yourself. In addition to the legal requirement, you should track it to make sure any form you receive has the correct amount on it. If the form shows more money than you received, check with the issuer/payer to get the form corrected. IRS puts a lot of faith in the forms but they are sometimes wrong. I see quite a few wrong ones every year.

The 1099-MISC is not attached to your return so no need to have it except in at least one situation. If the payer withheld federal or state income tax, you want the form to make sure the amounts are correct and that the payer reported the withholding to IRS and any applicable states. Federal withholding usually only applies when you are subject to backup withholding, a subject I will not get into here. If you are subject to backup withholding, you should already know that. State withholding is more common as many states require payers to withhold taxes on service providers who are not residents.

Recommendations

If you do not receive a 1099-MISC, check with the payer. If they issued on it is best to have a copy so you can make sure your records agree with the amount on the form. If they do not and you cannot get the form changed, then you need to be able to explain the difference. Other than human error, the most common difference is payments at the end of the year. The payer includes the payment on the form when they send payment while cash basis taxpayers include the payment when they receive it the next year.

If they payer says they did not issue a form 1099-MISC, then go with your records of what you received. Any penalties for not issuing a form are on the payer not the recipient.

Finally, do not obsess over not receiving a 1099-MISC. Your records (bank statements, invoices, etc.) are what you are required to keep.

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Year-end tax planning – part 3

U.S. Currency – Wikimedia Commons

Here are some final year-end tax planning ideas for 2014.

Some of these items are more for 2015 than 2014 but now is the time to put them in place.

  1. If you have a Health Savings Account (HSA) available, maximize your contribution for 2015. Unlike Flexible Spending Accounts (FSA), you do not lose the amount in a HSA that is not used by the end of the contribution year. Some FSAs have been amended to allow a full carryover for two months and 15 days into the next year or a carryover of a maximum of $500. This is an either or option – either the plan allows the carryover of unused FSA money of no more than $500 to the next year OR it allows a two month and 15 day grace period into the next year to allow the use of the rest of the FSA balance.
    A HSA allows you to carryover the entire balance as long as you live.
  2. If you own your own business and want to establish a 401(k) plan for 2014, the deadline is 12/31/2014. Of course, waiting until now severely limits your ability to have much withheld from your pay for 2014 employee contributions. Setting it up now gets you ready for 2015 and it still allows an employer contribution to the 401(k) plan for 2014.
  3. If you miss the deadline for establishing a 401(k) for your business for 2014, do not forget that a SEP plan can be established up to the deadline for filing your 2014 return.
  4. If you are harvesting tax losses and reinvesting the proceeds, consider investing in more tax efficient investments. Mutual funds and ETFs that trade actively generally generate more ordinary dividends and capital gains than the invest and hold funds. Index funds are often more tax efficient than actively managed funds.
  5. Again, if you sell some investments before year-end to harvest the tax losses then consider investing some of the proceeds in tax-exempt bonds, mutual funds or ETFs. If your income tax rate is relatively low, you need to consider whether the tax savings makes sense considering the lower interest tax-exempt investments usually return. Also keep in mind that if interest rates start to go up, the value of tax-exempt bonds, mutual funds and ETFs go down in value as rates increase.
  6. If your employer does not provide qualifying ACA (aka Obamacare) health insurance then consider obtaining a qualifying health plan so you can avoid a 2015 penalty. The penalty increases for 2015 over what it is for 2014.
  7. Take 529 education plan distributions in the same year as the qualified education expense. Most colleges and universities like to be paid in December for the following spring semester or quarter. If you or your child happens to be graduating in the spring, they may not have enough qualifying expenses to make a spring 529 plan distribution tax-free.
  8. Consider a Roth IRA contribution for your children if they otherwise qualify. A Roth allows no deduction but qualified withdrawals are tax-free unlike regular IRA contributions that are generally taxable. If your child’s only income is wages of $4,000 or less, they probably will not owe any federal income tax so not being able to deduct the Roth contribution is no big deal. Your child has until April 15, 2015 to make a Roth IRA contribution for 2014.

Do you have any favorite tax planning ideas I forgot? Please add them in the comments.

You can also see part 1 and part 2 in the year-end tax planning posts.

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Year-end tax planning – part 2

Tax Deductions by Chris Potter, on Flickr

Accelerate deductions

Assuming your tax rates are the same or higher this year than they will be next year, then you should consider accelerating deductions into this year.

If you are on the cash basis, almost all individuals are, then you can prepay deductible items that are due next year. For example:

  • Real estate taxes, in NC they are generally not late until after January 5th of next year but is it really worth waiting an entire year for the deduction to keep the money for five days?
  • Personal property taxes.
  • Charitable contributions.
  • Final state and local estimated tax payments that are traditionally due in January of the next year.
  • Pay outstanding medical bills if you will be able to itemize medical deductions (usually only amounts in excess of 10% of your adjusted gross income are deductible).
  • Pay your January home mortgage payment early. Make sure the mortgage company gets it before the end of the year so they credit it to the year you paid.
  • If you are in business, consider:
    • Buying assets subject to the Section 179 deduction. Currently, the limit is a maximum of $25,000 but Congress is considering changing the limit. Eligible assets are typically tangible personal property but the rules are complex. Check first to see if the asset is eligible as getting a refund from the seller may be difficult. There are other limits to keep in mind too that are not detailed here.
    • Pay year-end bonuses this year that are due in January of next year. Bonuses are still wages and subject to withholding taxes when paid to an employee.
    • Stock up on office supplies.
    • Prepay part of next year’s rent. Do not go overboard, only up to twelve months prepaid is deductible.
    • Complete repairs (not improvements) and pay for them this year.

Other options:

  • Sell capital assets (e.g. stocks, mutual funds, and bonds) at a loss to offset capital gains and net a loss of $3,000 that can be deducted against other income. Watch out for the wash sale rule. This rule postpones losses if you buy the same or a similar asset (e.g. an option on the stock you sold) within 30 days before or after the loss sale date. For some people it is best to pretend it is 31 days as IRS does not forgive you for counting the days wrong.
  • If you pay off your credit card balance every month, consider using your credit card to pay your deductions. There is no tax advantage in using a credit card versus paying in cash. The advantage comes from getting the deduction when the charge goes through versus when the payment is made to the credit card company next year. If you carry a balance on your credit card (i.e. you pay interest) then this option is much less attractive and may be cost more in interest than it saves in taxes.
  • Businesses on the accrual method of accounting cannot generally accelerate deductions by paying them early. For example, an accrual business gets no benefit from paying this year for inventory to be received next year. The prepayment is treated as non-deductible deposit. Accrual businesses can take advantage of the Section 179 deduction and they have other options.

Keep in mind that if you claim the standard deduction instead of itemizing, accelerating deductions may not make much sense. Instead you should consider bunching itemized deductions into one year so that you can itemize and claiming the standard the next year (or vice versa – standard this year then bunch next year).

Finally, keep in mind that tax planning is a multiple year process. Saving tax this year at the cost of even more tax next year does not make sense. Also, be aware that if you owe Alternative Minimum Tax or are close to owing then accelerating some deductions, such as taxes, may not save any federal tax.

Most important

Do not allow the “tax tail to wag the dog.” In other words, the most important thing is how much you have after taxes. For example, a contractor should not buy a new generator just for the tax deduction when her old generator works just fine. The tax savings are less than the cost of the new generator.

Year-end tax planning part 1 is available here and pat 3 is here.

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Year-end tax planning – part 1

U.S. Currency – Wikimedia Commons

Income deferral

Deferring income into the next year is one of the most common year-end tax planning devices. The idea is to push the income into a future year when your tax rates will be lower. Even if your tax rates will not be lower next year, deferring income still makes sense as long as your rate next year will not be higher. As long as the tax rates are the same, paying in the future is usually better than paying today.

How do you defer income? Here are some possibilities:

  1. Sell stocks, mutual funds, bonds, and other capital assets that have gains next year instead of this year.
  2. Do not buy a mutual fund between now and the end of the year as mutual funds typically pay out any capital and ordinary gains in the last month of the year.
  3. If you are self-employed and your business is on the cash basis, delay billing your customer(s) until closer to the end of the year or next year. Do not abuse this tactic. If your customer offers to pay you this year and you get them to hold the payment without a good business reason (i.e. a reason unrelated to taxes) then IRS will consider you to have received the income this year. IRS may also question delayed billings if you put it off too long. If you typically bill within 15 days of completing a job and decide to wait six months to defer the income, IRS can ignore the deferral. They will make the the argument that your customer would have paid before year-end if you billed them in a normal time frame. One way around this is to arrange the payment terms BEFORE you start the job (e.g. make it part of the contract terms).
  4. Do not exercise non-qualified stock options until next year. Watch out, do not let an in the money option expire just to save some tax. Some after tax income is better than none.
  5. Ask your employer about the possibility of a non-qualified deferred compensation plan. This is more for next year as the deferral has to be in place before the beginning of the year to which it applies. Be careful with this tactic as you can lose the deferred compensation if your employer goes bankrupt. The non-qualified part means the deferral is not subject to the normal protections provided to employer pension plans.
  6. Defer as much as possible into your retirement plans – 401(k), 403(b), etc.

Unfortunately, Congress has made planning difficult because of the Alternative Minimum Tax and all the phasing out of deductions and credits. So postponing income into next year may cost you a tax credit, deduction or increase your Alternative Minimum Tax in the future. When you plan, always consider the effect to both this year and future years.

Most important

Do not allow the “tax tail to wag the dog.” In other words, the most important thing is how much you have after taxes. For example, if the stock you want to sell has a big gain now, consider the cost of waiting to sell next year when its price may have dropped significantly.

You can now read part 2 and part 3.