Filing the Correct 1099 for the IRS
As a tax professional, you play a vital role by making sure the proper documents are filed on behalf of your clients.
California information return reporting requirements are generally the same as federal; and any person, including a corporation, partnership, limited liability companies, individual, estate, or trust that makes reportable transactions during a calendar year must file appropriate information returns to report those transactions to the Internal Revenue Service (IRS) and the Franchise Tax Board (FTB) by February 28, following the tax year for which they are filing.
We encourage all payers to file electronically. Payers or transmitters who file electronically through the IRS Combined Federal/State Filing program do not need to separately file certain information returns with us.
IRS Combined Federal/State Filing
If you use the IRS Combined Federal/State Filing Program, you only have to file once. The IRS will forward your California returns to us. Only the following forms may be filed under this program:
You are still responsible to file the following returns with us:
Payers who file paper information returns with the IRS should not send a paper copy to us. The IRS will forward the information to us, whether the payer is located inside or outside of California.
Payers subject to an exception that requires them to report differently for federal and state purposes, such as a different dollar amount, must file separate information returns with the IRS and us.
The IRS has many different federal Form 1099s that report various types of income such as nonemployee compensation, interest and dividends, or brokerage proceeds. For a complete list of all required returns and what to report, go to irs.gov and search for A Guide to Information Returns. In general, the penalty for each failure to file an information return with the IRS and/or the FTB is $50, with an annual maximum of $250,000. If the failure is due to intentional disregard, the penalty is the greater of $100 or 10 percent of the total amount of the items that should have been reported with no maximum. Penalties may be waived for reasonable cause.
Information reporting encourages taxpayers to include all reportable income on their voluntarily filed tax returns. For independent contractors, FTB, in cooperation with the Employment Development Department (EDD), began in 2010 to devote greater resources to verify that business expense deductions for wages and compensation paid to employees and independent contractors are supported by federal Forms W-2 and 1099.
We also have the ability to deny deductions for amounts not timely reported on 1099s. Revenue and Taxation Code (R&TC) Sections 17299.8 and 24447 provide that we may disallow deductions to individuals and entities for amounts paid as remuneration for personal services if the entities do not report the payments on Forms W-2 or 1099-MISC as required under California Unemployment Insurance Code Section 13050 (W-2s) and R&TC 18631 (1099-MISC).
Additionally, R&TC Section 19175 provides that if individuals or entities do not report amounts paid as remuneration for personal services, we or the EDD may impose a penalty of up to 12.3 percent of the unreported amounts. Again, this is in addition to the disallowance under R&TC Sections 17299.8 or 24447.
The strongest tool available for tax law enforcement is the audit process whereby government personnel closely examine a taxpayer’s source documents and tax calculations. As part of our audit process, we review Forms W-2 and 1099 to support business expense deductions. We may disallow business expense deductions for these types of payments, and may impose penalties for each form that is not filed.
When we examine business records, failure to report payments made for attorney fees is one payment area where we often see noncompliance. While generally payments made to a corporation are an exception to the requirement to report on a federal Form 1099-MISC, payments made to a corporation for legal services, such as attorneys’ fees, have been required to be reported since 1998. Medical and health care payments are also required to be reported even if paid to a corporation.
Proper filings must also support other business expense deductions such as rent, profits, and income payments, among others.
For more information, refer to FTB Publication 4227A, Guide to Information Returns Filed with California. Find more information and reporting requirements for Forms 1098, 1099, 5498, and W2-G at ftb.ca.gov and search for information reporting, and in FTB Publication 8305 Reporting Requirements for Forms 1098, 1099, 5409, and W-2G.
Payers should not file the following the IRS forms with us:
- 1099-CAP, Changes in Corporate Control and Capital Structure
- 1099-H, Health Insurance Advance Payments
- 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
- 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA
We accept the IRS’s extended due date of March 31 for electronically filed Forms 1099, 1098, and W-2G.