Q:

Subject: Frustrated in Missouri

Dear Kerry,
I am a professor at a nice Midwestern state university.  To save my university embarrassment, please do not include my email address or last name if you elect to post this on your blog (as you are welcome to do). I am writing because I am frustrated by all the steps my bureaucratic organization has placed in the way of quickly accomplishing some tasks under the guise of following the law.  If my university is correct, then I have been doing something wrong in my part-time business.  Therefore I am asking for your guidance.

When an organization hires someone to perform a service (in this case our department decided to hire two guest speakers for the benefit of our students), what are the legal obligations of the organization to obtain their social security number or other tax identification number?  Is there a cut off (in dollars) where this is necessary?  If so, what is this amount?

I can understand the IRS requiring us to obtain this information once a certain threshold has been reached (say $5,000 or more) so my organization could issue a 1099-Misc.  However, this seems a very poor use of time for small expenses like the $175 stipend we are trying to pay our guest lecturers.  In my own small business, I do not ask for a SSN or a TIN when I hire a consultant.  I recently paid an independent contractor $550 to design a website for my business.  When he finished the job, I simply paid him.  Did I break the law or a IRS regulation by doing so?  If not, is there one rule for private businesses and another rule for public (or semi-public) institutions?

If you tell me that there is no IRS requirement to collect this information for small services (and please be specific), I will take up the quixotic challenge of trying to change my institution.  On the other hand, if you tell me my institution is simply following the law by requiring us to collect this information (and then requiring a formal contract for even the smallest service), then I will apologize to my administrators and bring this up with my legislators.

Thank you,

A:

You really should check the IRS's instructions for filing 1099 forms  to see the official requirements.

Basically, for payments to most unincorporated individuals for services, a 1099-MISC form is required to be filed with IRS if total payments during the calendar year are $600 or more.

From a logistical perspective, when to use Form W-9  or other means to ascertain a payee's tax ID number is a little tricky.  Some businesses do require that info before any payments are made because it is too much hassle for  them to keep a running total during the year and only ask people when they are close to reaching the $600 threshold.  That is probably the case for your school and does seem to be fairly standard practice around the country. 

While this information gathering may technically be unnecessary for persons who will definitely not be receiving at least $600 during the calendar year; convincing them to stop asking for it is going to feel like spitting in the wind.  It has become so accepted a practice that you will have a very tough time convincing them to change.  It is unfortunately the case in this country that people (your school administrators) are so petrified of offending the IRS that they do go overboard and over-report payments made.  IRS actually likes this and will be of no help in persuading them to reduce their record keeping in this regard

As the 1099 instructions do explain, most payments to corporations are not required to be reported on 1099s.  Payments to attorneys are the main exception to this rule.  I have seen cases where both the payers and payees have only conducted business with other corporations.  If you are pursuing this on behalf of friends, you may suggest that they consult with their personal tax advisors regarding incorporating their businesses.

If you have been following the discussions of how IRS is supposed to close the tax gap, the main culprits they are after are small businesses who have all been tarred as being tax cheats.  This means that it's only a matter of time before that $600 threshold is reduced to just 51cents (which rounds up to one dollar) and the exemptions for payments to corporations is removed.  This will make your entire crusade to reduce the ID gathering requirements at your school a moot point.

Although I'm obviously not being very helpful in your goal of reducing the bureaucratic paperwork at your school, I hope I have at least helped you understand more about why they are doing things that way.

Good luck.

Kerry Kerstetter

Follow-Up: 

Kerry,

Thank you for a fast and clear reply.  I found you (and your blog) today when I was searching for a CPA blogger in my frustration.  While I am still not happy about the paperwork (and may still aim at my school's need to have contracts in place for basic services), you have convinced me that I would be wasting my time asking them to quit asking for ID numbers.

 

You've also gained a new reader.

 

Best regards,

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2007 11:46:00 AM Send this post: