Sorting Out Confusion About Tax Information Returns

Information returns are tax-reporting forms required to be submitted to the IRS. In turn, the IRS uses the information to cross-check reporting by taxpayers. According to the IRS’ annual enforcement report, information returns greatly increase the compliance rate; taxpayers generally report on their returns the income that is reported to them on information returns, while there is considerable underreporting of income not reflected on information returns. Being in business means you must issue certain information returns and that you will receive certain information returns. Sound confusing? Here’s what you need to know so you can get things right on your 2011 tax return.Issue W-2 Forms to EmployeesThe king of information returns is the W-2 form. If you have an employee who earns any amount from your business, you must issue an annual Form W-2 to report the wages, income tax, and FICA tax withholding, along with certain other employment-related payments.Employers were supposed to include the value of health coverage on 2011 W-2s, and whether such coverage was paid for by the employer, employee, or both. However, the IRS postponed this reporting rule so that small-business employers (those who issue fewer than 250 W-2s in the prior year) do not have to include this information until 2013 W-2s, which will be issued in 2014.Deadline: You must distribute 2011 W-2s to employees by January 31, 2012.Issue Form 1099-MISC to Independent ContractorsIf you have independent contractors (self-employed individuals) who perform services for you, issue Form 1099-MISC to report annual payments (called nonemployee compensation) totaling $600 or more. Issue a form to each such worker. You can issue a return for payments of lower amounts, but you are not required to do so.You also must issue this information return for:

• Legal services for your business of $600 or more. This requirement applies even if the attorney’s firm is incorporated.
• Rents of $600 or more. This requirement covers rentals for office space as well as for machine rentals.

Caution: Only include on Form 1099-MISC the payments you made by cash or check. Payments made by credit card are reported on a different information return explained later.Deadline: You must distribute 2011 1099-MISCs to recipients of the payments listed above by January 31, 2012.Receive Form 1099-KMerchants who accept credit cards, debit cards, and other electronic payments for transactions in their business now receive a new information return, Form 1099-K, from the bank or other processor. This information return lists the gross amount of transactions (sales) made via these payment methods on a month-by-month basis.The 1099-K does not contain any entries for adjustments for returns, allowances, cashbacks, and other amounts that reduce the gross transactions. Merchants using this information return must be sure to account for reductions so they don’t over-report their sales income.Tax returns for businesses all have a new line specifically created for entries from Forms 1099-K. However, instructions to the returns tell businesses not to use this line for 2011 transactions. Instead, report the 1099-K amounts, along with other gross receipts, on the line designated for gross receipts; include allowances and other adjustments on the line designed for this purpose as well.Final ThoughtStill confused? Failing to meet your reporting burden can result in costly penalties, so be sure to know the rules. Work with a knowledgeable tax advisor who can guide you with your tax-filing requirements and see that things get done right! 

About the Author

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for 2011 and 2012. Follow her on Twitter: @BarbaraWeltman.