Accounting & Bookkeeping & Small Business Forum

[doubllane]

Hi All!

I know the 1099 is used for contractors, but is it also used to send out to people I have purchased merchandise from? The accountant I used to form my S Corp just informed me that I should send a 1099 to every person who I have paid in excess of $500 to. This is absolutely alarming news to me, because I buy lots of computers on CraigsList and elsewhere, mostly with cash, and I know that most of the individuals involved never imagined a 1099 is coming and thought they were dealing with a more informal transaction. I have purchased over $20K from a couple individuals as well, so a 1099 will be a huge shock to them (although, of course, realistically they should be expecting to pay taxes on income).

My accountant also informed me that it is my option to not send out 1099s, but that the risk of an audit would increase, and the penalties could be severe, i.e. could potentially have to pay income tax on the full amount of the entire purchase price. I am just wondering what everyone's thoughts are on this, i.e. what are the penalties, and is he saying I need to send 1099s just to cover himself and are they perhaps not typical to send out for my situation? I'm also interested to know what kind of taxes I could be hit with if I decided to pay taxes on behalf of the sellers. As I did not inform the sellers 1099s would be coming, I feel somewhat responsible and am entertaining the thought of paying it myself, if that is at all realistic. Plus, I don't want anyone to slit my tires.

Thanks in advance! It's funny, in the process of starting my business, I feel that I am stumbling along in the dark and constantly making mistakes out of ignorance. Maybe in a year I'll be able to write a "How Not To Start A Business" book. :-)

Also, thanks to the many people who replied to my last post about finding a good accountant. I have not responded because I am not sure I am ready to take the jump to a new accountant, but I will likely be following up with soon.

John

[stasia2003]

doubllane wrote: Hi All!

I know the 1099 is used for contractors, but is it also used to send out to people I have purchased merchandise from? The accountant I used to form my S Corp just informed me that I should send a 1099 to every person who I have paid in excess of $500 to. This is absolutely alarming news to me, because I buy lots of computers on CraigsList and elsewhere, mostly with cash, and I know that most of the individuals involved never imagined a 1099 is coming and thought they were dealing with a more informal transaction. I have purchased over $20K from a couple individuals as well, so a 1099 will be a huge shock to them (although, of course, realistically they should be expecting to pay taxes on income).

My accountant also informed me that it is my option to not send out 1099s, but that the risk of an audit would increase, and the penalties could be severe, i.e. could potentially have to pay income tax on the full amount of the entire purchase price. I am just wondering what everyone's thoughts are on this, i.e. what are the penalties, and is he saying I need to send 1099s just to cover himself and are they perhaps not typical to send out for my situation? I'm also interested to know what kind of taxes I could be hit with if I decided to pay taxes on behalf of the sellers. As I did not inform the sellers 1099s would be coming, I feel somewhat responsible and am entertaining the thought of paying it myself, if that is at all realistic. Plus, I don't want anyone to slit my tires.

Thanks in advance! It's funny, in the process of starting my business, I feel that I am stumbling along in the dark and constantly making mistakes out of ignorance. Maybe in a year I'll be able to write a "How Not To Start A Business" book. :-)

Also, thanks to the many people who replied to my last post about finding a good accountant. I have not responded because I am not sure I am ready to take the jump to a new accountant, but I will likely be following up with soon.

John

Hi John. Go here to see what the IRS says about the 1099-MISC. Depending on the situation, you may be off the hook. Also, the minimum is $600 before a 1099 must be sent out.

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

[dp1903]

Quote: I know the 1099 is used for contractors, but is it also used to send out to people I have purchased merchandise from?

No, in my opinion. The exceptions on page 1 of the link stasia provided exclude payments made for merchandise.


Quote: My accountant also informed me that it is my option to not send out 1099s, but that the risk of an audit would increase, and the penalties could be severe, i.e. could potentially have to pay income tax on the full amount of the entire purchase price.

This is bad counsel in my opinion. Bartering exchanges in excess of $600 are required to be reported, but not cash paid for merchandise unless the transaction was paid in cash or its equivalent equaling or exceeding $10,000. [But this would not be reported on 1099] The maximum penalty for failure to file a 1099 is $50 per 1099. See page 12 of link below.

http://www.irs.gov/pub/irs-pdf/i1099gi.pdf

If you make direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment then you are required to file a 1099-misc. See page 1 of link provided by stasia. So, it could be that your suppliers are supposed to provide you with a 1099 if you purchased $5,000 or more of computers for resale anywhere other than a permanent retail establishment. But, that is not your responsibility.

Any fees in excess of $600 to an attorney are required to be reported to him on a 1099, see link provided by stasia. [/quote]

If you are still using this accountant, I'd show him what the 1099-misc instructions say and what the general instructions for 1099 say about penalties. If he wants to dispute this, ask him to show you from where he gets his info. I wouldn't take an answer like, "I know what the IRS guidelines are" for an answer. I'd ask him to show you the actual text from the authoritative source. He's lost his credibility in my eyes at this point.
That's the best I can do.

[doubllane]

Thanks so much guys! I thought I was losing my mind, but fortunately what you have described seems to confirm my sanity. Are there other variations of 1099 that might come into play though? Anyway, I will present this to my accountant and see how he responds. Again, thank you for the great information, and this forum is really an amazing tool!

DP1903, you mention cash transactions over $10K need to be reported. I don't have a single cash transaction over $10K, but I do have suppliers I have paid over $10K to in multiple transactions. I'm just curious, where and how would this be specifically reported?

Like you mentioned it sounds like my suppliers should be giving me a 1099, which is fine by me because I will soon have a reseller number. Since they are cash transactions, though, I doubt I'll be seeing 1099s from them.

Does anyone know a good tax/small business lawyer in the Chicago area? I've got an accountant (albeit likely an incompetent one), and I'm realizing I should probably be asking a lot of my questions simultaneously to a lawyer.

Thanks again!

John

[dp1903]

Quote: DP1903, you mention cash transactions over $10K need to be reported. I don't have a single cash transaction over $10K, but I do have suppliers I have paid over $10K to in multiple transactions. I'm just curious, where and how would this be specifically reported?

Here's the link:

http://www.irs.gov/businesses/small/article/0,,id=148821,00.html


"What payments must be reported?
A business must file Form 8300 to report cash paid to it if the cash payment is:

*
Over $10,000,
*
Received as:
1.
One lump sum of over $10,000,
2.
Two or more related payments that total in excess of $10,000, or
3.
Payments received as part of a single transaction (or two or more related transactions) that cause the total cash received within a 12-month period to total more than $10,000.
*
Received in the course of trade or business,
*
Received from the same buyer (or agent), and
*
Received in a single transaction or in two or more related transactions."


I suggest reading the link. It gives specific examples of what should be reported and what doesn't have to be and it defines "CASH". A check is not considered cash and therefore does not need to be reported, neither does a wire transfer of $7,000 plus a $4,000 cashier's check. The link should give you a good feel for what to be reported. Form 8300 is the form to use for this. If you paid suppliers over $10,000 IN CASH in multiple, i.e. unrelated, transactions then THEY are not required to file the form. This pertains to cash paid to your business, not you paying someone else.

[Ahshucks]

You are required to issue 1099s to professional service accounts such as lawyers. Cumulative payments $600 and above are issued a 1099 if they are in a form other than a corporation. It is a good practice to issue a W-9 to each vendor and maintain a file.

http://www.irs.gov/pub/irs-pdf/fw9.pdf