40.5 Reporting Certain Payments and Receipts to the IRS

In certain situations, you are required to report payments and receipts to the IRS. If you fail to comply with this reporting, you can be penalized.

Payments to independent contractors.

If you pay independent contractors, freelancers or subcontractors a total of $600 or more within the year, you must report all payments to the IRS and the contractors on Form 1099-MISC. Furnish the contractor with the form by January 31, 2013, for the 2012 payments. You must file the form with the IRS by February 28, 2013 (April 1, 2013, if you file the form electronically).

Caution

Reporting Requirements for Merchant Transactions

Banks and credit card processors report to the IRS all credit card and electronic payments (including PayPal) of merchants. Exempt from reporting are “small” merchants (those with no more than $20,000 in total payments involving 200 or fewer transactions).

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The penalty for not filing or filing late depends on the extent of tardiness. For example, the penalty is only $30 per information return if you miss the due date but then file correctly within 30 days. The maximum penalty can go as high as $75,000 for a small business, which includes a self-employed individual with average annual gross receipts for three years of $5 million or less.

Receipts of cash payments over $10,000.

If you are paid more than $10,000 in cash in one or more related transactions in the course of your business, you must report the transaction to the IRS. “Cash” includes currency, cashier’s checks, money orders, bank drafts, and traveler’s checks having a face amount of $10,000 or less received in a transaction used to avoid this reporting requirement. File Form 8300 with the IRS no later than the 15th day after the date the cash was received. For example, if you receive a $12,000 cash payment on May 1, 2013, you must report it by May 15, 2013. If the deadline falls on a Saturday, Sunday, or legal holiday, file by the next business day.

You have until January 31 of the year following the year of the transaction to give a written statement to the party that paid you. In the example above, this means giving the statement to the party that paid you on May 1, 2013 by January 31, 2014.

There can be civil and even criminal penalties for not filing this return.

Pension distributions to employees.

If your business maintains a qualified retirement plan and makes distributions from the plan to you or any employee, you must report the distributions to the IRS on Form 1099-R and furnish a copy to the recipient.

Furnish each contractor with a Form 1099-R by January 31, 2013, for 2012 payments. You must file the form with the IRS by February 28, 2013 (April 1, 2013, if you file the form electronically).

The penalty is $25 per day for late filing, up to a maximum of $15,000.

Retirement plans.

If you maintain a qualified retirement plan (other than a SEP or SIMPLE-IRA), you must file an annual information return with the Department of Labor unless your plan is exempt.

No return is required if you (or you and your spouse) are the only participant(s) and plan assets at the end of 2012 do not exceed $250,000.

File Form 5500-EZ if you (or you and your spouse) are the only participant(s). If your plan covers employees, file Form 5500. The form is an IRS form, but it is filed with the Employee Benefits Security Administration of the U.S. Department of Labor. The due date for the form is the last day of the seventh month after the close of the plan year (e.g., July 31, 2013, for 2012 calendar-year plans).

The late filing penalty is $25 per day (up to $15,000).

Small cash transactions.

If you are in a business, such as a convenience store, liquor store, or gas station, that sells or redeems money orders or traveler’s checks in excess of $1,000 per customer per day or issues your own value cards, the government asks that you report any suspicious transactions that exceed $2,000. While this filing isn’t mandatory (there is no penalty for nonfiling), the Treasury Department asks that you report when someone provides false or expired identification, buys multiple money orders in even hundred-dollar denominations or in unusual quantities, attempts to bribe or threaten you or your employee, or does anything else suspicious.

File Form TD F 90-22.56 with the Treasury Department within 30 days of the suspicious activity. Under federal law, you are protected from civil liability so the person you report cannot sue for damages.

Wages to employees.

If you have any employees, including your spouse or child, you must report wages for the year to the Social Security Administration and the employee. Furnish the employee with Form W-2 by January 31 of the year following the year in which the wages were paid (January 31, 2013, for 2012 wages). File all W-2 forms for 2012 with the Social Security Administration by February 28, 2012 (April 1, 2013, if you file them electronically).