With the close of the year, this is a simple reminder that physician medical practices must issue and file with the IRS Form 1099-MISC to each person to whom was paid during the year at least $600 in:
- Services performed by someone who is not your employee.
- Payments to an attorney
The 1099-MISC must be sent to any person or vendor that does not file their tax return as a corporation, except for attorneys. If you think a 1099 must be issued, now is a good time to have your person or vendor to prepare and send back to you an IRS Form W-9. Here is a link to Form W-9:
A person who pays attorneys' fees of $600 or more in the course of that person's trade or business must report those fees on Form 1099-MISC as "nonemployee compensation." The term "attorney" includes a law firm or other provider of legal services.The exemption from reporting payments made to corporations does not apply to payments for legal services. Therefore, payers must report attorneys' fees or gross proceeds paid to corporations that provide legal services.
Employee Business Expense Reimbursements
Employers should not use Form 1099-MISC to report employee business expense reimbursements.
Payments to Independent Contractors
Form 1099-MISC is the form taxpayers must use to report amounts paid to independent contractors. An example of nonemployee compensation includes professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, subcontractors, etc.
What if you don’t issue a Form 1099-MISC?
Imagine this: you didn’t issue Form 1099-MISC to your contractors. Now, the IRS is auditing your tax return, and the auditor claims you lose your deductions because you didn’t issue the Form 1099-MISC. Is this correct?
No. IRS auditors often make this claim, but they are incorrect. There is no provision in the tax law that denies you a deduction for labor expenses simply because you didn’t file the required Form 1099-MISC. However, the tax court has stated that the non-filing of required Form 1099-MISC can cast doubt on the legitimacy of the deduction claimed.
As with any deduction claimed on the tax return, you have to keep sufficient records to substantiate the deduction amount. If you had filed Form 1099-MISC, then this would have been solid documentation to help prove the expenses to the auditor. But since you didn’t file Form 1099-MISC, you need to provide ironclad documentation to prove the expenses, including some or all of the following:
- Bank statement transactions
- Canceled checks
- Credit card statement transactions
- Invoices from the contractor
- Signed agreements with the contractor
- A signed statement from the contractor verifying the amounts received
Ultimately, to prove your deduction in a court of law, should you have to go that far, you’ll need to show by a preponderance of the evidence that you made the payments. This means that your evidence has to make it more than 50 percent likely that you did make the payments to the contractors.
Besides the extra trouble of proving the deductions, keep in mind that the cost of not filing Form 1099-MISC surfaces a financial penalty. As you can see below, filing truly does avoid trouble. The potential penalties of not filing are:
- $270 per Form 1099, or
- $550 per Form 1099 if the IRS determines you intentionally disregarded the requirement.
Have questions? I’m here to help.