BY THE NUMBERS 1099-MISC Nonemployee Compensation Reporting The PATH Act and Its Impact on Nonemployee Compensation Reporting2 About this report The 1099-MISC Nonemployee Compensation Reporting study delivers a snapshot of numbers and trends related to 1099-MISC forms with Box 7 values—or forms indicating nonemployee compensation—heading into reporting season for Tax Year 2018, with a particular focus on regulatory changes that have occurred recently and are likely to happen in the future. To compile this report, Sovos used these sources of information: • Updates to the regulatory environment, both federal and state. • IRS Publication 6961, which highlights paper and electronic tax information and withholding documents received by the IRS, broken out by form type for the prior tax year. The publication also predicts the following nine years of tax form volumes. Publication 6961 for Tax Year 2017 was released on August 21, 2018. • Information gleaned from leading industry trade publications. • Sovos numbers based on experience working with more than half of the Fortune 500 Nonemployee compensation is growing quickly Deadlines imposed by the PATH Act have led to a rise in late and incorrect filings Coming regulatory changes will tighten deadlines and increase the complexity of 1099-MISC reporting Highlights The largest private 10-series filer in the US, Sovos automates tax information reporting obligations to safeguard businesses from the burdens and risks of compliance. Background: The PATH Act The Protecting Americans from Tax Hikes Act, more notorious as the PATH Act, is still causing problems with tax information reporting as its third season approaches. At the end of 2015, Congress passed the PATH Act, and it took effect for Tax Year 2016. The PATH Act moved reporting deadlines up significantly just as form volumes were beginning to gain momentum, particularly for the 1099-MISC with nonemployee compensation. With states following the federal model and also moving deadlines forward, and with the IRS shortening filing time again for Tax Year 2018, payers face an unprecedented risk of financial penalties and more pressure than ever to streamline reporting processes for speed and efficiency.3 Nonemployee compensation growing 38 percent of all 1099-MISC forms have Box 7 values indicating nonemployee compensation IRS publication 6961 projects 1099-MISC filings to grow 15 percent by 2026 At the same time, W-2 forms, which indicate full-time employees, will grow by only 3 percent, according to publication 6961 The impact of the PATH Act According to the Social Security Administration via Tax Notes, by July of 2017, the number of Tax Year 2016 W-2 forms filed late had doubled from Tax Year 2015, and the number of W-2 corrections was up 30 percent compared to Tax Year 2015 Automatic extensions to deadlines will disappear In Tax Year 2017, 50 percent of organizations filed for an automatic extension of time allowing them 30 extra days to file. This extended the Jan. 31 deadline to March 4, allowing more time to validate and correct information before filing. However, the extension will no longer exist for Tax Year 2018. The cost of reporting penalties The average proposed penalty per payer for incorrect information filed is $400,000 for payers in financial services and $221,000 for other payers; those penalties are per payer, NOT per company, as a single company can have multiple payers Early reporting fights fraud As a result of the PATH Act and requiring information in January versus the traditional March deadline, the IRS prevented $6 billion fraudulent refunds from being dispersed, according to the Identity Theft Tax Refund Fraud Information Sharing and Analysis Center. The Numbers 1099-MISC forms with Box 7 ValuesThe impact of recent regulatory changes One of the goals of the PATH Act was to stop the IRS from issuing potentially fraudulent refunds. Originally, the deadline for filing 1099-MISC Box 7 and W-2 forms was March 31, but the problem for the IRS was that it began issuing refunds on Feb. 15, meaning the agency was issuing refunds without receiving information from payers about how much money was paid to employees and independent contractors. So, the IRS moved the reporting deadline to Jan. 31—albeit with an available 30-day automatic extension of time that would push this due date back to March 4. While the move did help the IRS fight fraud, the impact of the deadline change was severe for payers, with late and corrected filings both skyrocketing. Worse still, states began to follow the IRS model and move their deadlines forward, with 21 states having moved their deadlines to Jan. 31 since the PATH Act took effect. According to the Social Security Administration via Tax Notes, by July of 2017, the number of Tax Year 2016 W-2 forms filed late had doubled from Tax Year 2015, and the number of W-2 corrections was up 30 percent compared to Tax Year 2015. Looking to the future For Tax Year 2018, the IRS has taken yet another step to accelerate deadlines by eliminating the automatic 30-day extension of time for the 1099-MISC form with Box 7, or nonemployee compensation. Instead of being due in early March with the automatic 30-day extension, forms are now due to the IRS by Jan. 31, 2019, except in a few extenuating circumstances. This now aligns with W-2 reporting deadlines, as the IRS has not allowed extensions for the W-2 since the passage of the PATH Act. The elimination of the 1099-MISC extension represents another major step toward eliminating refund errors and fraud and finally rounds out all of the expected changes from IRS for the W-2 and the 1099-MISC forms with nonemployee compensation. Also for Tax Year 2018, the IRS has issued additional guidance on best practices for reporting 1099-MISC with and without Box 7 values in an effort to alleviate penalties. Beyond Tax Year 2018, the IRS is likely to remove the automatic 30-day extension of time for form types that have large volumes or large income values, or are growing in form volume at a rapid rate. Despite the objections of small businesses, paper-based 1099 filing might disappear: Currently, about 1/3 of all 1099-MISC forms–more than 30 million–are filed on paper, making it virtually impossible for the IRS to process them by Jan. 31 in compliance with the PATH Act. Analysis: The importance of centralization and automation With the PATH Act continuing to have a major impact, new reporting demands call for cleaner, technology-driven processes with a centralized, multi-disciplinary team carrying out tax reporting and a system in place providing a single source of accurate data. Functional and technological silos that prevent communication among departments and slow the process of collecting and filing data are now a major liability and could lead to IRS penalties. Having a single team work within a single system in a streamlined filing process is essential. Now is the time to avert expensive penalties at all levels by centralizing and automating the 1099 reporting process. Organizations need to rethink their strategies in order to avoid potentially expensive consequences. Sovos has been facilitating 1099 reporting for more than three decades. Find out why no other solution provider is as well-equipped as Sovos to meet the new challenges of 1099 reporting .About Sovos Sovos is a leading global provider of software that safeguards businesses from the burden and risk of modern tax. As governments and businesses go digital, businesses face increased risks, costs and complexity. The Sovos Intelligent Compliance Cloud combines world-class regulatory analysis with its secure, scalable and reliable S1 cloud software platform to create a global solution for tax determination, e-invoicing compliance and tax reporting. Contact us +1 866 890 3970 www.sovos.com/contact Boston, Minneapolis, Atlanta, Boulder, London, Amsterdam, Santiago and São PauloNext >