New Laws for 1099’s That Can Be Costly to Your Church

We understand that pastors and church staffs are issued W2s, but many churches fail to properly file 1099’s. Churches, other nonprofits, and businesses are required to issue a     W-9 to contractors, unincorporated landlords, guest ministers, guest speakers, guest singers, guest musicians (honorariums) they will pay $600 or more during a calendar year.

To help ensure you have accurate information in time to file 1099’s, it is a good practice to have your guest complete the W-9 form before services are rendered in time for you to proof it for omissions and errors. This is critical with the implementation of “The Small Business Jobs and Credit Act of 2010” that increases fees for errors, omissions, and filing late.

Section 2102 of the Small Business Jobs Act of 2010 increased penalties for failure to file information returns, failure to furnish correct payee statements, and for intentional disregard of the law.

 What does that mean for returns filed January 1, 2011 and thereafter?

  •  It means that if you pay an unincorporated landlord or any minister, singer, guest lecturer, or contractor who is paid nonemployee compensation (issued a W2 by your church) $600 or more during a calendar year and fail to issue the minister a 1099 your church can incur a $250 penalty for intentional disregard per return you failed to issue. Let’s say you failed to file ten—that is $2,500 in penalties.
  • It means if you pay an honorarium and failed to receive a completed W-9 from the payee, which lists his or her Social Security, legal name, address, and signature, then your church is subject to fines and penalties. The W-9 is what provides you with the information on the payee you will need to complete the 1099, extremely important with penalties now being doubled.
  • It is your church’s legal obligation to have the W-9 completed. A few years ago a minister who had a great relationship with the church leadership where I worked stopped in town one weekend and they allowed him to minister and even did a special offering for him in addition to the honorarium. It was quite a significant amount. I called the guest minister to obtain an email address where I could send the W-9 so he could bring the completed form with him that morning when he picked up the check. He informed me that he would not be filling out a W-9. I notified the pastor and quoted him IRS regulations and he told me to do what the law requires. In effort to obtain a completed W-9 when the minister arrived I explained to him as gently as possible that IRS guidelines required me to withhold 28% from his check if he refuses to provide me his Social Security and that I would need to issue a new check later that day when I can obtain the necessary signatures. He stood angrily in front of my desk and then snatched the W-9 off the desk and completed it. I then released the check. It was an uncomfortable situation, but IRS laws trumped my discomfort. My responsibility was to the church and to ensure I did not put it at risk because of fear or awkwardness. On a sad note, I did lose a great deal of respect for that minister.
  • Now if your church is renting a building from a sole proprietor who refuses to complete a W-9 (as that can get pretty ugly) or if your pastor or church board decides “it’s better to just issue the honorarium without any fuss,”  the law is very clear in what must done—you must begin backup withholding immediately on any reportable payments for any payee refusing or neglecting to provide a TIN. The current rate for US citizens is 28%.  See IRS Publication 1281 for further guidance. (Always use wisdom and operate within federal, state, county and your church’s guidelines and seek an attorney when dealing with rental issues)
  • The changes also mean that if you have a typo, misspelled name, transposed numbers, or omissions within the Social Security, your church is subject to penalties from $30 to $100 per return. Please note that the $30 only applies to return errors corrected within 30 days of submission. The question is how many of us review 1099s we have issued after we have already filed them with the IRS? So, your penalty will more than likely be $100 per form issued with errors. Because it’s normally a year or more when the IRS informs you of your error.

Things to know:

  • The IRS may impose a $50 penalty for any payee who fails to provide the payer a correct TIN.
  • A payee who provides false information on a form W-9 is subject to a $500 penalty, criminal penalty, and/or imprisonment.
  • The payee is not legally required to sign the form W-9 unless he/she has been notified  that he/she previously gave an incorrect TIN.
  • Failing to obtain a W-9 and failing to withhold backup withholding subjects your church to being assessed tax at the 28% backup withholding rate, as well as interest and penalties for lack of compliance.

 

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6 Responses to New Laws for 1099’s That Can Be Costly to Your Church

  1. Marzetta says:

    As for as I know my church has never given a1099 or W2 form but wants to start a lot of old members have left and they don’t have records of any 1099 or w2

    • Hi Marzetta,

      Your comment is about W-2’s and 1099’s, but we want to make sure you understand that “members” do not receive 1099’s or W-2’s unless they are also employees or contractors for the church. W-2’s are issued to paid employees and 1099’s are issued to contractors your church has paid $600 or more within a year. Please read our previous blog posts:

  2. Tammy blaedr says:

    We were issued a 1099 by a church that purchased sound equipment from us. We do charge labor to install the equipment. We are not a corporation. They issued the 1099 for the total amount of the invoice, which included the sound equipment they purchased. We have never received a 1099 from a church before. Should we have received a from them1099?

    • Tammy thanks for your question:

      Churches, other nonprofits, and businesses are required to issue 1099’s to contractors, unincorporated landlords, unincorporated business they receive services or products (parts, materials, equipment, etc), prize winners, attorneys (incorporated or not), and anyone they pay honorariums, love offerings, etcetera, other income payments – they will pay $600 or more during a calendar year.

      You mentioned that you have never received a 1099 before. If you frequently provide services or sell products to churches and have not received a 1099 this may be because the services or sales were less than $600 in a calendar year or the more common reason—many churches are unaware they are legally required to issue 1099’s.

      You also mentioned that you are not a corporation – this is more than likely the reason you received the 1099, since corporations are not to be issued 1099’s.

      If they paid you for the equipment, it is to be included in the total on the 1099. You then need to seek an accountant as to how to write off your expenses, such as your cost for the equipment.

      We are not tax consultants, so if you have a small business, you may find it helpful to have an accountant to walk you through what your tax requirements are.

      The information contained in this blog is general in nature and is not intended to provide, or be a substitute for, legal analysis, legal advice, or consultation with appropriate legal counsel. You should not act or rely on information contained in this training without seeking appropriate professional advice.

      IRS Circular 230 Notice: United States Department of the Treasury Regulations require us to inform you that to the extent this training and any resources mentioned hereto concerns tax matters, it is not intended nor disseminated to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by United States Internal Revenue Code.

  3. Travis says:

    so if i understand, the church where I serve that has never filed any 1099s id required by law to have me fill out a w-9, give me a 1099 (even at this late date) to avoid the $250 penalty and perhaps incur a lesser penalty for late filing(per payee, which is just me).
    is this correct?
    as well, could the IRS go back and penalize the church for years past?

    • In response to your inquiry about the church where you “serve” not issuing you a 1099:
      I’m not sure of what your position is. If you are an employee, such as a pastor or secretary, you are NOT to receive a 1099, but a W-2. Pastors are not contract employees. Many pastors have been penalized for being incorrectly classified as a contractor by the church they pastor.

      If you are a senior pastor, and you are invited to preach at another church (not one you pastor), then that church should have you to complete a IRS Form W-9, which is used to gather information for the church to issue you a 1099 if you receive %600 or more in a calendar year from that church.

      Please read our previous posts for more details – the links are below.

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