Episode 41: Ask the Expert, Volume 3

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Welcome to another episode of Information Return Intelligence, the fast moving weekly podcast where we talk about all things related to 1099s. My name is Jason Dinason, and let's get started with this week's episode powered by IOFM. This week it's another Ask the Experts. This is Ask the Experts Volume 3. We do this every now and then on Information Return Intelligence, where we pull questions that people have either submitted to IOFM's Ask the Expert feature or simply sent to me. Remember, every week on this podcast, you shouldn't make final decisions based on anything that you hear or see if you're watching the YouTube version of it, the video version. This is not tax advice, and I'm not your accountant, so always seek out paid advice before you take any actions. So let's jump right in to Ask the Experts with our first question this time around. This is a long question about B notices. We understand the IRS instructions for B notice mailing say your outside mailing envelope must be clearly marked important tax information enclosed or important tax return document enclosed. We also know this statement is required for some information reporting forms, and the second statement is used on our mailing envelopes. But does this statement have to physically be on the envelope itself, or is it allowable to instead have it on the internal letter above the addressee showing through in a window envelope, which is more cost effective? So what this person really is asking about is in B notice situations, when you send a B notice, the IRS procedures as laid out in publication 1281 say that the words important tax information enclosed or important tax return document enclosed have to be on the envelope. And publication 1281 specifies it has to be on the outer mailing envelope. And the question is does that literally mean the outer mailing envelope? What if you put it on a document inside the envelope that shows through the window on the envelope? Which this person says would be more cost effective for them than getting an envelope with that printed on it. Well, publication twelve eighty one says what it says. And the exact quote in publication twelve eighty one is the outer mailing envelope must be clearly marked, important tax information enclosed, or important tax return document enclosed. Notice it says outer mailing envelope. There's no further instruction given on what that means. Does it mean what if it's visible through the address window but is actually printed on a document inside the envelope showing out the window? That's not addressed in any IRS guidance anywhere. The regulations say nothing about this, the regulations just say that the IRS will establish procedures for these things. My opinion is go with the literal interpretation of the IRS guidance, and that means putting those words on the outer mailing envelope is the safest thing to do. So outside on the outside of the envelope. Now there is also a question about when you're soliciting for tins not in a B notice situation. So in other words, you're just asking for a W9 from your vendor. Do you have to include those words anywhere? The answer is no, there's no instruction anywhere like in the W9 instructions or other IRS guidance that says a normal run-of-the-mill W9 tin solicitation requires any special language anywhere. Question: If a company is paying a garnishment settlement to a collection agency for an employee, would that amount be 1099 reportable? The answer is no. If it's just a collection agency that you're sending money to, it's no. And most of the time, no matter who you're sending a garnishment to, the answer is no. Because nothing is ever easy, there is a longer answer to it. So it's no regular old garnishments, you have no 1099 reporting obligation to whoever you're sending the money to. Unless it is an attorney or a law firm that you're sending the garnishment to, then it would be box 10 of 1099 miscellaneous. So, for example, let's say one of your employees is behind on child support and you're ordered to garnish their wages and send the garnishment to a law firm that's handling the dispute between the ex-spouses. That's a transfer of money to a law firm that is not for services rendered to your organization by that firm. And that is a classic example of box 10 of 1099 miscellaneous, gross proceeds paid to an attorney. But otherwise, just regular old garnishments, you have no 1099 reporting obligation. Next question: one of our departments offers an honorarium payment to non-employees that make up their governance board. One of the board members has declined to take the honorarium payment. How is this handled for 1099 reporting? Since the payment was rejected, is it treated as a donation to a charity? Since we are a 501c3 nonprofit? The answer is this is still 1099 reportable to the board member. And I'm certain that the board member will argue with you about this and say that it's not. But it is. You intended to compensate them. You set the money aside and it's available for them. And that is one of the requirements under section 6041 and the regulations under section 6041 for when a transaction becomes reportable is the money is set aside and made available for the recipient's use. And so your recipient, the board member, has dominion and control over this payment. It is theirs. The fact that they tell you to keep the money doesn't change that fact. So you will issue a 1099 to them, and with boards of directors, it's 1099 NEC, is what the proper form would be. Now, part of the question was we're a 501c3, so is this a charitable contribution? The answer is yes, it would be a charitable contribution, but it's also still 1099able income to that board member. They'll have income and then they might be able to take a deduction for a charitable contribution. But that doesn't change the fact that you issue a 1099 NEC. This is something that we talk about a lot when I teach the CPRS course at IOFM, the Certified Payment Reporting Specialist course. And let's talk a little more about that CPRS course through our sponsor, IOFM. The Payment Reporting Specialist Certification Program is designed for those responsible for dealing with 1099 issues in their organization, and we cover all aspects of it, including what we just talked about. People who say, I'll just send my money to this charity. Well, that's still a 1099 transaction to that person. We talk about that at length in the CPRS course. The CPRS designation is one of several certification courses offered by IOFM, and people going through this training range from one-person shops or departments all the way up to large organizations. CPRS is available in an online on-demand setting, or even better, come to one of IOFM's in-person conferences. The next one is coming up November 2nd through 4th in Austin, Texas. Check out IOFM.com for more information on how to go to the conference in Austin, how to go through the CPRS certification, how to become an IOFM member, or just more about IOFM. I do a lot of things with IOFM and I'm always happy to refer people to IOFM. Check them out at IOFM.com. And now back to the show. Next question. We have corporate offices in Denver, Fargo, and Minneapolis. We have additional branch offices located across the country. We are incorporated in North Dakota, and our W9 shows our Fargo, North Dakota office. To further complicate things, we are engineers. Part of our services are done on site in multiple states, and part of our services are done virtually. Which states would we need to file state 1099s with? Now this is an example of yet another question where the answer is probably a lot more than the person who asked it bargained for. Because there's really two issues. One is issuing 1099s to your contractors. 1099 reporting to states depends on where the services are provided. And this may mean allocating payments to various states where work is performed. So for example, your organization is in Fargo, North Dakota, and you hire a contractor who works in North Dakota, but maybe they cross over into Montana sometimes to do some work on the ground in Montana. You're going to have to determine for the payments that you made to that contractor what portion represents payment for services provided in North Dakota, and what portion represents services provided in Montana, and divide between those two states, and then look at those two states to see what they require for 1099 reporting. You might not need to send anything, but you're gonna have to look in that state. If you have a contractor who travels all around, you mentioned offices in Colorado, North Dakota, and Minnesota. Maybe they go to those three states. They go to Montana, Nebraska. Now you wouldn't have to worry about South Dakota. South Dakota has no income tax, so there wouldn't be a 1099 issue there. But say they go to Nebraska, Montana, maybe even over to Iowa. You're gonna have to look at where are they when they're providing services and how much did you pay them when they were doing that? And you're gonna allocate your contract labor payment based on where they were when they did the work, and then figure out what do we need to report, if anything, to that state. That's one issue. The other issue relates directly to your organization and is not a 1099 issue. It's the same concept though. Where are you, meaning your firm's employees or contractors, when doing the work for your customers? Your organization's income is allocated to that location. And this turns into an income tax issue, not a reporting form issue. It's a tax issue, income tax issue called Nexus, where you might have to file a tax return in that state that you're doing things in. So you may not have offices in Montana, but if your business is crossing the border into Montana and conducting business in Montana, you might have Nexus in Montana and need to file an income tax return there. So that's an example of how this can all go sideways very, very quickly. I don't know if sideways is the best word. It can just get complicated in a real big hurry. So I would say have a conversation with whoever the applicable party is in your organization. That brings us to the end of another Ask the Experts. Ask the Experts Volume 3. This episode brought to you as always by IOFM. Check them out at IOFM.com. If you liked what you heard today, make sure to like and subscribe and share with a colleague. You can check out all of our podcasts at podcasts.dinasonmedia.com. I'm Jason Dinason. Join us again next week. Dinason Media Ventures.