So, you think you can dodge your income tax responsibility by failing to provide your Social Security Number to a company who used your services?
Let’s talk a little more about what happens when you fail to provide the required information to the Internal Revenue Service. There are two sides to this problem.
Problem 1 – The company doesn’t want to issue a 1099 because they want to pay the person “under the table.” Well, under the table means “off the books.” If you don’t report the amounts paid to that person, then you do not get to take a deduction for those amounts. That is how tax deductions work. In order for one company to claim a deduction, another person or company must claim the income. This process keeps tax from being paid on the same income twice, with obvious possible exceptions. Now, if you want the deduction, but do not issue the 1099-MISC, you not only stand to lose the deduction, but you will also face penalties for failing to file. The penalties start at $50 per form if they are under 30 days late and jump to $100 per form after the 30-day mark.
Problem 2 – an independent worker refuses to furnish his/her Social Security Number or Tax Identification Number. They think they’re pulling a fast one, right? Wrong. The IRS is already onto them and have been for years. The company that paid you is still required to file a 1099-MISC with or without that Social Security Number. They will simply file the form with no number in the box. However, your name and last known address will be on the form. The IRS already knows who you are.
In about 60 days, you will receive a letter at your new address, because the IRS gets notified of all changes in addresses. You are now subject to backup withholding. What’s that, you ask? Your bank accounts will withhold 24% of all interest and dividend payments to you. Your other vendors will be instructed to withhold 24% of all payments to you. Your merchant accounts, if you accept credit cards in your business – 24%. PayPal – 24%. Stock and broker transactions, rental income, and any other income you receive from other people, except those whom you convince to pay in cash. You will have this backup withholding monkey on your back until you supply the original company your Social Security Number so they can file a corrected 1099-MISC.
The IRS takes information reporting very seriously. It is their only method of keeping everyone honest. This stuff really isn’t hard. Don’t make life more difficult than it needs to be. File your forms on time and leave the games to the kiddies at home.
One final note. I spent some time last week chatting with Karl Palachuk about the new taxes. We started our conversation discussing Forms 1099 and vendor payments. Here is the link if you’d like to take a listen: SMB Community Podcast