1099 Reporting by linxiaoqin



                                                                           1099 Reporting
On September 17, 2009, the NAPCP hosted an audio call on the topic of 1099 reporting
(“Piecing Together 1099 Strategies for P-Cards”). The audio call speaker was Nancy Hill, card
program coordinator for Intermountain Healthcare in Salt Lake City, Utah. As follow-up to the
audio call, the NAPCP is providing Nancy’s various 1099 materials; refer to subsequent pages.

Speaker Contact Information
Nancy Hill
Phone: (801) 442-3790

The content shared herein is not tax advice. The NAPCP and the audio call speaker assume no
legal liability or responsibility for the accuracy of the information provided. Contact your tax
department or other appropriate entity to ensure compliance with the regulations.
1099 Reporting Payee Types

Corporation – Non-exempt corporations are 1099 reportable ONLY for
medical/health care services and legal services.

Corporation = Code 3 in Incorporation Status field on card provider’s 1099 Merchant Report

   1. A Corporation may use an abbreviated name or initials, but its legal name
      is the name on the articles of incorporation.
   2. A Corporation’s TIN is an EIN assigned by the IRS.
   3. Use W-9 to verify corporation status.

   Exempt Corporations – Not 1099 reportable under any circumstances
     1. Tax Exempt Entities (501a, 501c)
     2. Charities

   Medical and Health Care Payments
     1. Payments to physicians or other providers of medical services.
         • Drug screening, pre-employment screening
         • Lab services
         • Ambulance services
         • Payments specifically “to get someone better”
         • EAP payments
     2. Do not need to report payments to pharmacies for prescription drugs

   Legal Services
      1. Attorney fees
      2. Settlements

Sole Proprietor – 1099 reportable

Sole Proprietor = Code 1 in Incorporation Status field on card provider’s 1099 Merchant Rpt

   1. A sole proprietor may have a “Doing Business As – (d.b.a.)” trade name
   2. Payment may be made to “d.b.a.” name.
   3. 1099 is reported to business owner’s name; the name used when the sole
      proprietor applied for a TIN
   4. A sole proprietor’s TIN can be either a SSN assigned by Social Security
      Administration or an Employer Identification Number (EIN) assigned by
      the IRS

Government Agency – Not 1099 reportable

Govt. Agency = Code 7 in Incorporation Status field on card provider’s 1099 Merchant Rpt

   1. Government Agencies are exempt recipients and are not subject to 1099
   2. Governmental Units:
         • The United States – or any of its agencies or instrumentalities
         • A state, the District of Columbia, a possession of the United States,
             or any of their political subdivisions including local government,
             public schools, the courts, etc.
         • A foreign government or any of its political subdivisions
1099 Reporting Payee Types (Cont.)

Partnership – 1099 reportable

Partnership = Code 2 in Incorporation Status field on card provider’s 1099 Merchant Rpt

   1. A partnership may use the name(s) of the partners, or the partnership’s
      “d.b.a.” name. They are 1099 reportable, unless determined to be a
      corporation, by verifying their status from the Payee’s W-9. (See
      Corporation section above)
   2. Payment may be made to the name(s) of the partners, or the partnership’s
      “d.b.a.” name.
   3. 1099 is reported to the name used when the TIN was applied for
   4. A partnership’s TIN is an EIN assigned by the IRS
   5. Commonly used partnership abbreviations are:
          • LLP Limited Liability Partnership: 1099 Reportable
          • LLC Limited Liability Company: Almost always partnerships, but
             possible the company has been set up as a corporation. Verify
             status from Payee’s W-9
          • Co. Company: This abbreviation does not indicate the legal
             status of the entity. A Company could be a corporation, partnership
             or sole proprietor. Verify status from Payee’s W-9.

          •   LTD Limited: This abbreviation does not indicate the legal status
              of the entity.
               A LTD could be a corporation, partnership or sole proprietor. Verify
              status from Payee’s W-9
          •   S-Corp         A partnership entity, treated as a Corporation for 1099
              reporting purposes

       NOTE: The above entities are formed for tax purposes. They may or may
       not be corporations. The designation of LLC, LLP, LTD by itself does not
       allow for assumption of its legal status.


Individual = Code 1 in Incorporation Status field on card provider’s 1099 Merchant Rpt

   1. Usually doing business for themselves, with no business name
   2. Payment is made and 1099 is reported to the name shown on Social
      Security Card
   3. An individual’s Tax ID Number (TIN) is a Social Security Number (SSN),
      issued by the Social Security Administration

   Employee Conditions

   An independent contractor is a professional service provider. These
   individuals are considered independent contractors because they generally
   train themselves and, when hired, accomplish the job with minimal direction
   or instruction from the employer. Independent contractors usually perform
   work for a number of other companies and people, and they typically hire any
   others they need to work for them.
1099 Reporting Payee Types (Cont.)

  An employee usually works for one employer and has set hours of work.

  Listed below are criteria, which must normally be met in order for an individual
  to be considered an independent contractor. All of the criteria listed must be
  taken into consideration; only individuals meeting the majority of criteria will
  be paid as independent contractors.

     1. Supervision and Control: Independent contracts have the authority to
        control the manner and means by which their work will be

     2. Work Location, Hours and Equipment: Independent contractors
        generally determine their own working hours, and they generally
        provide and control the use of their own work places, facilities,
        equipment and tools.

     3. Operation of Independent Business: Independent contractors
        generally operate their own independent business; carry their own
        workers’ compensation and liability insurance; compete in the open
        market and generate their own business and provide services to other
        clients in addition to Company XYZ. They usually are not dependent
        solely on Company XYZ for their livelihood.

     4. Performance of Work Not Usually Provided by Company XYZ
        Employees: With the exception of____________, independent
        contractors provide services that are not usually performed by
        Company XYZ employees.

     5. Risk for Profit or Lost: Independent contractors have opportunities
        for profit or loss, and they invest time and money in their work with no
        guarantee of success.

     6. Method and Timing of Payment: Independent contractors usually
        work on a fee-for-service basis rather than an hourly wage, and
        typically receive lump-sum payment on completion of a job.

     7. Permanence of Employment Relationship: Independent contractors
        typically perform work on a sporadic or temporary basis, or under
        contracts established for a defined period of time. They generally do
        not have an ongoing or indefinite working arrangement with Company

     8. No Taxes or Benefits: Independent contractors do not receive
        Company XYZ payroll checks; they do not have taxes withheld; and
        they are not eligible for any employee rights or benefits, including leave
        accrual and vacation.

     If in doubt, contact 1099 Tax Expert for determination.
1099 Reporting Payee Types (Cont.)

   Employee 1099 Exception

      Certain conditions exist where an employee may receive both a 1099 and
      a W-2 from Company XYZ. If payments made to an employee have been
      flagged as 1099 reportable, the recipient and their Social Security Number
      will be identified on the 1099 Error Report

      Justification is required for all 1099’s issued to a Company XYZ
      employee. The 1099 Error Report should be returned to the 1099 Tax
      Expert for final verification of information pertinent to the Employee
      Receiving a 1099. Please refer to the 1099 Reports section of this
      document for additional information.

      An individual cannot be both an employee and an independent contractor
      simultaneously, unless, as an independent contractor, the employee’s
      business activities:
                    • Are unrelated to his or her Company XYZ employment;
                    • Are approved by Company XYZ for absence of conflict
                        of interest;
                    • Are selected through valid purchasing procedures; and
                    • Qualify for independent contractor status as defined the
                        Company XYZ H.R. Policy -

             Instances where an employee may also receive a 1099 include:
                    • Rent
                    • Royalties
                    • Services outside the employee’s normal course of
                    • Services provided after termination date
                    • Services “Prior to Hire” date: If an individual is hired at
                       any time during the year, all 1099 payments will be
                       transferred to Payroll for W-2 tax reporting purposes.
                    • Prizes and awards – 1099 Tax Expert review required

      If an employee performs other services for Company XYZ that do not
      qualify for independent contractor status, all payments for such services
      must be processed through the payroll system rather than the accounts
      payable system.

Nonresident Alien

A nonresident alien, identified generally by a signed Form W-8, with a foreign
address provided, is not subject to Form 1099 reporting.

It has been determined that reportable transactions made to nonresident aliens
should be forwarded to the 1099 Tax Expert.
Goods or Service


A “service” is defined as: work performed; a useful labor that does not produce a
tangible commodity.

To comply with 1099 reporting obligations, disbursements expensed against
certain general ledger codes should be reviewed on a routine basis. General
ledger codes that should receive particular scrutiny are the accounts identified
    • Medical and Professional fees
    • Non Medical Professional fees
    • Other Purchased Service
    • Maintenance and Repairs
             o It is not uncommon that an invoice for a service includes the
                  cost of materials necessary in providing the service. Under
                  such circumstances, the total amount of the invoice should be
                  included in the 1099 reporting process.

Goods – Merchandise

Payments for tangible goods, such as inventory items and “off the shelf” goods
are not reportable.

Custom designed goods are 1099 reportable
  • Suppliers of custom orthopedic devices
        o If you pay to have a technician design a custom apparatus - Report

   •   Manufacturers
          o If you pay for a service (e.g., Embroidered T-shirts with your
              company logo) - Report
   •   Craft vendors
          o If hiring someone to design and craft a custom item for you (e.g.,
              T shirt with company logo) - Report
Incorporation Status Field codes from Bank card Provider’s 1099 Merchant Report

    1 – Individual/ Sole Proprietor – REPORTABLE

    2 – Partnership – REPORTABLE

    3 – Corporation – SOMETIMES REPORTABLE

    4 – Medical or Legal Corporation – SOMETIMES REPORTABLE

    5 – Associations / Estates / Trusts – SOMETIMES REPORTABLE

    6 – Tax Exempt Organizations (501, 3, C) – NOT REPORTABLE

    7 – Government (Federal, State, Local) – NOT REPORTABLE

    8 – International Organization – NOT REPORTABLE

    9 – Limited Liability Company – SOMETIMES REPORTABLE
                                                                         Sample Response
Department of the Treasury
                                                                     To IRS B-Notice Penalty Letter
Internal Revenue Service
Ogden, UT 84201

RE:        Response to Notice ####
           Tax Period: YYYY
           Penalty Reference Code: ###
           Proposed Penalty Type: Late Filing, Missing or Incorrect TIN
           Name: Company Name Assigned to Tax ID
           Tax ID # ##-#######

This written statement is to notify the Internal Revenue Service that Company Name, TIN ##-#######
disagrees with the penalties assessed under Penalty Code # (you will find this referenced on the IRS
letter) for the tax year YYYY.

Incorrect TINS Penalty

Upon being notified by the IRS of missing or incorrect TINs being filed, your company name follows
processes as outlined in IRS Publication 1679, ensuring the B Notice solicitation are completed to the full
expectation of the Internal Revenue Service, as well as the expectations and requirements of your
company name Accounting Policies and Procedures. Please be advised that your company name adheres
to processes, which to the best of our ability, ensures correct reporting practices to the IRS. The processes
are as follows:

      1.   Continuous communication and education within the accounts payable departments associated
           with your company name, concerning the procedures of obtaining, as well as retaining the
           correct TIN information from our vendors.

      2.   Your company name’s policy is such that a disbursement of your company name funds is not
           allowed until a designated supervisor has verified each vendor has been set up accurately in the
           your company name vendor file database. This verification includes, but is not limited to: a
           completed W9 is on file, validating the vendor’s tax-payer identification number, and the vendor’s
           type of business for 1099 reporting purposes. In doing so, your company name is following our
           internal guidelines as well as guidelines set under IRS code 301.6724-1, that upon opening a
           vendor’s account your company name solicits a correct TIN and records it in the your company
           name vendor data base for future use.

      3.   To document that proper information is provided to your company name, mass mailings are sent
           to our vendors with the following:
           a. A letter, or B-Notice if applicable, explaining to the recipient the requirements of providing a
                correct TIN and name
           b. W9 form to be completed and returned to your company name in a provided self addressed
                stamped envelope

      4.   Modifications to your company name’s 1099 software programs are implemented annually to
           facilitate and accommodate IRS requirements for 1099 reporting and filing.

Your company name believes that the failure to meet IRS requirements in providing correct TINs for tax
period YYYY was due to reasonable cause and not willful neglect. We do not agree with the penalty
assessment associated with Penalty Reference Code ### for failure to file information as required.
Your company name respectfully requests a reversal of the proposed penalty be considered.


Your Company Name
                            - BEST PRACTICE -

                         IRS TIN Matching System
Why use the IRS TIN Matching System?
  • More accurate 1099 reporting
  • Reduce penalties ($50 per occurrence)
  • Catch errors before payment is issued

Getting Started
   • Seek approval from upper management to become a Principal for TIN
       matching purposes. The AP Manager is typically the Principal for TIN
   • After obtaining management approval, log on to www.irs.gov to access
       IRS e-services and apply online to be your company’s Principal. You must
       enter your adjusted gross income from your previous year’s tax return.
   • Wait to receive your Confirmation Code mailed to you by the IRS (this
       takes 1-2 weeks). Enter your confirmation code into the IRS website,
       complete the registration steps, and start using the TIN matching system
       to verify TIN’s.
   • Add Delegated Users by having them follow the application process on the
       IRS website. They must also enter their adjusted gross income from their
       previous year’s tax return and receive a confirmation code from the IRS.

TIN Matching
  • Interactive Session – submit up to 25 Name/TIN Combinations to be
     matched to the IRS records and view results instantly.
  • Bulk TIN session – submit a .txt file containing up to 100,000 Name/TIN
     combinations and receive a response within 24 hours.

A Recommended Best Practice Process
   • Perform an interactive TIN match before setting up any new US supplier.
       Do not create vendors until a successful match is performed. File the IRS
       screen print displaying the successful match and file with the W9 form.
   • Perform an interactive TIN match on your 1099MISC recipients forms to
       identify errors, and correct all errors before issuing 1099’s to recipients
       and the IRS.
   • Perform Bulk TIN matching on all active vendors in your vendor file
   • Do not submit the same Tax ID number more than twice in one day.
   • The TIN Matching Functionality will be suspended for 96 hours due to
       security violation.

Foreign Payees
   • A W-8BEN form from should be required for all foreign payees before
      creating the vendor in your vendor file to establish that the payee is not a
      US person.
   • Consider withholding tax and issue a 1042S form to foreign payees that
      perform services in the US.
   • TIN matching is not performed on foreign payees.
Vendor Verification Documentation

Vendor Name:                         Vendor ID #

Reviewed by:                         Date:

         Verified that standards in naming conventions and spelling were followed.
         Verified employment with HR/Payroll System.
         Searched existing vendors for duplicates by:

        Verified that standards in naming conventions and spelling were followed.
        Verified vendor phone number (DEX & YELLOWPAGES.COM = REVERSE LOOK UP)
        Called the vendor directly and verified company information
        Obtained a signed W9 or the electronic equivalent.
        IRS TIN Verification

      Verified 1099 setup is correct
       Searched existing vendors for duplicates by:

        Contracted Vendor
        Contract On File


Date Added to Vendor File Notes:
Vendor Call Sheet

Vendor Name:                                          Vendor ID #
Call made by:                                         Date:

Vendor Name as verified
(W9 Name)

Vendor Physical Address

Vendor Phone Number

Federal Tax Identification Number
Social Security Number

Check if Applicable:
     A Division of
   (Same Federal Tax ID as Parent)                               (Parent Company)
      A Wholly-Owned Subsidiary of
       (Different Federal Tax ID than Parent)                    (Parent Company)

            Business Type:     (Check One)          Business Activity:     (Check One)
             Corporation                              Real Estate Rental/Lease
             Partnership                              Employment Rental/Lease
             Sole Proprietorship                      Royalties
             Individual                               Medical/Health Care
             Trust/Estate                             Consultant/Professional Fees
             Government Agency                        Service Only
             Non-Profit                               Merchandise (goods) only
             Exempt                                   Merchandise (goods) & services
             Foreign Entity                           Legal Firm/Attorney/

Vendor information given by: ____________________________ / ______________
                                         (Full Name and Title)                           (Phone #)
                                    No                               No
Transaction                                                                                                        END
                      Service                   Custom Goods
                         ?                           ?                                                           No 1099        Purchasing Card Transaction
                    Yes                                                                                                          1099 Reporting Flowchart


                                  Yes                                           No                  No
                                                                                      Medical or                      Legal
                    Corporation                                                       Health Care
                                                                    ?                  Services                      Services
                                                                                           ?                            ?


                                                                                     Yes                       Yes                                  2
                                                                                                                                   Merge Pcard
                       Sole               Yes
                                                                                                                                 Information with        Year End 1099
                                                                                                                                AP 1099 reporting       Reporting Process

              Yes   Government
      1              Agency



              No                    Yes                                    No
                                                       Employee                       Alien              Yes
       2             Individual
                                                          ?                             ?                                 2


                                                   Employee 1099           Yes
                                                    Exception ?



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