Section 6041 of the tax code requires all persons or entities engaged in a trade or business who make payments in any tax year of $600 or more in the course of that trade or business to an independent contractor report that income to the IRS on Form 1099-MISC. This reporting requirement is designed to improve tax compliance based on the assumption that payees are more likely to correctly report their taxable income if they realize that payors are reporting that income to the IRS.
The income tax regulations specify that “all persons engaged in a trade or business” includes not only for-profit organizations, but also nonprofit and tax-exempt organizations. Treas. Reg. 1.6041-1(b)(1).
Exempted from this reporting requirement are most payments made to corporations.
The Patient Protection and Affordable Care Act (part of this year’s healthcare reform legislation) amended the tax code to require the issuance of a Form 1099-MISC to corporations that are paid $600 or more during the year in the course of the payor’s trade or business (with a copy going to the IRS). Exempted from this requirement are payments made to tax-exempt corporations. This provision applies to payments made after December 31, 2011.
A bill (H.R. 5982) introduced in July by congressman Scott Murphy (D-NY) would have repealed this change in the tax code. It failed to pass.
KEY POINT. When this provision takes effect in 2012 it will relieve churches of the obligation of determining if payees are incorporated or unincorporated, since a Form 1099-MISC must be issued to either (assuming the payee receives annual compensation of $600 or more)./i>
KEY POINT. It is important for church leaders to be aware of this new reporting requirement beginning in 2012, since a failure to issue a Form 1099-MISC to corporate service providers can result in penalties under sections 6721, 6722, and 6723 of the tax code.
EXAMPLE. In 2010 a church hires a local landscaping contractor to provide landscaping services for the church for an annual fee of $5,000. The contractor is unincorporated and self-employed. The church is required to issue the contractor a Form 1099-MISC reporting the compensation paid to him. It sends a copy of the Form 1099-MISC to the IRS.
EXAMPLE. Same facts as the previous example except that the contractor is incorporated. The church is not required to issue a Form 1040-MISC to a corporation since it is assumed that the corporation will issue the appropriate form (W-2 or 1099) to the contractor.
EXAMPLE. Same facts as the previous example, except that the year is 2012. The church is required to issue a Form 1099-MISC to the contractor, even though he is incorporated, with a copy going to the IRS.
This article first appeared in Church Finance Today, October 2010.
