Ask the Experts, Volume 3

Question: We understand the IRS instructions for B-Notice mailings 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? (more cost-effective)

We also use this statement for TIN solicitation letters, but is it actually required for this, or just good practice?

Answer: In Publication 1281 (https://www.irs.gov/pub/irs-pdf/p1281.pdf) the IRS states in multiple places that the “outer mailing envelope must be clearly marked IMPORTANT TAX INFORMATION ENCLOSED” or “IMPORTANT TAX RETURN DOCUMENT ENCLOSED.” No further guidance is provided as to whether “outer mailing envelope” could mean “visible through the address window but actually printed on a document inside the envelope.”

The regulations are silent on this matter and simply defer to IRS procedures. See regulation 31.3406(d)-5(d)(2)(i).

We would go with a literal interpretation of the IRS guidance that the “outer mailing envelope” (i.e., outside, on the envelope itself) is the safest thing to do.

As for requesting information, if it’s not a B Notice situation, the Form W-9 instructions make no such reference to including such language anywhere.

Question: If a company is paying a garnishment settlement to a collection agency for an employee, would that amount be 1099 reportable? 

Answer: No, you do not need to report a garnishment to whomever you are sending the money to — with one exception. If you’re sending the garnishment to a law firm, and the total amount sent to the firm is $600 or more, then you’d report the garnishment in box 10.

Example: One of your employees is behind on child support. You are ordered to garnish their wages and send the garnishment to a law firm that is handling the dispute between the ex-spouses. This is a transfer of money to a law firm that is not for services rendered to you by that firm. This is 1099-reportable in box 10 of Form 1099-MISC.

Note: This type of reporting is still stuck at $600. The reason is that gross proceeds paid to an attorney (which is the technical name for box 10 of Form 1099-MISC) is from section 6045 of the tax code. The change from $600 to $2,000 is part of revisions to sections 6041 and 6041A of the code.

But to give you a short answer to your question: no (unless the money is being sent to an attorney or law firm).

Question: One of our departments offers an honorarium payment to the 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,” as we are a 501(c)(3) nonprofit organization?

Answer: This is still 1099-reportable to the board member. At first glance, it might seem like it wouldn’t be reportable, since you’re not actually making a payment. However, the money is set aside and made available to the board member. This is one of the requirements under the regulations for whether a transaction is reportable. The recipient — the board member, in this case — has dominion and control over this payment. The fact that they tell you to keep the money doesn’t change this fact.

You’ll issue a 1099-NEC to them. As a 501(c)(3), this would be treated as a charitable contribution by the board member, and they might be entitled to a charitable deduction on their tax return. This doesn’t change the fact that you issue a 1099-NEC.

Note that as a 501(c)(3), you are probably (hopefully) familiar with the rules around issuing proper receipts to people who make donations. Make sure the board member gets such a document, in addition to the 1099. (This is not a part of information return reporting, but is mentioned here as an FYI reminder.)

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; part of our services are done virtually.

Which states would we need to file state 1099s with?

Answer: As always, there’s more to this than meets the eye.

The question is about what states they need to file 1099s with. The answer is, any state where they have a contractor on the ground doing work. It doesn’t matter where the company’s headquarters is. This goes for W-2 and employees, too. Where is the worker when they’re doing the work? The answer determines which state to file a form in.

With 1099s, not every state would necessarily require you to actually file a 1099, but you’d need to look.

But there’s another angle: this issue of nexus. This is an income tax issue, not a 1099 or W-2 issue. Again, it doesn’t matter where your company’s headquarters is. What matters is: where is work happening? If you have nexus in a particular state, it opens up the need to file an income tax return in that state.