Tax season is always hectic and confusing, especially if you have no experience with it. Like many other organizations, homeowners associations also need to file Form 1099-MISC, even if you are classified as a non-profit. Learn more about this important IRS form below.
What Is IRS Form 1099-MISC?
Your homeowners association operates like a business in some ways. It hires vendors to provide various goods and services, which leads to a lot of disbursements. Moreover, these vendors are not considered employees of your HOA. In the eyes of the Internal Revenue Service, your association is a business — albeit a not-for-profit one — and must, therefore, file Form 1099-MISC.
Form 1099-MISC is used to report miscellaneous income to the IRS. By law, your HOA must keep a record of all the disbursements it made to vendors, regardless of your legal structure. Miscellaneous income can be in the form of rent, medical or health care payments, prizes and awards, payments to an attorney, and other income payments. Your association automatically triggers the need to file 1099 Form MISC if the amount it pays to a vendor equals or exceeds $600 in a calendar year.
The Difference Between Form 1099-MISC and Form 1099-NEC
In 2020, the IRS introduced Form 1099-NEC (non-employee compensation), which is a new method for filing your homeowners association’s self-employment income. In the past, businesses used Form 1099-MISC for both self-employment income and miscellaneous income. Now, though, there is a clear distinction.
But, what exactly is non-employee compensation? These are payments your association makes to unincorporated businesses or individuals who render at least $600 worth of services to your HOA but who are not your employees. This includes payments to vendors for repairs and maintenance work, snow removal, landscaping, web design, and professional services (such as accounting and legal services). Generally speaking, this is the most common type of payment homeowners associations make.
Exceptions to the Rule
Before filing Forms 1099-MISC or 1099-NEC, it is important to understand that there are certain exceptions to the rule.
Your association is not required to send such forms to businesses or vendors that are taxed as corporations. In other words, you only need to send them to unincorporated individuals or businesses.
Additionally, the burden of filing these forms often gets passed on to your HOA management company (if you have one). If the management company makes the payments on your association’s behalf, then that company usually files Form 1099-MISC.
Vendor TINs and Backup Withholding
Your association must provide the Taxpayer Identification Number (TIN) to the IRS when filing 1099 forms. Remember that you must file 1099 forms when your total payments add up to or exceed $600 to any vendor, so you never know when this will be triggered. As such, you must set up procedures to acquire the TINs of all your vendors. For instance, you might want to ask vendors to supply your HOA with their TIN before you make payments.
In case your association fails to secure vendor TINs for 1099 filing, you must then provide the IRS with backup withholding. This is when you withhold and remit a part of every payment to the IRS. The exact percentage varies usually between 24 and 28 percent.
Failure to pay backup withholding carries a pretty heavy penalty, too. The IRS can even hold the individual responsible for handling backup withholding payments personally liable. That means the filer has to pay the amount the association should have withheld in the first place.
Deadline and Where to File Form 1099-MISC
Homeowners associations must file Form 1099-MISC and send it to both the IRS and to the payee. There are differing deadlines, though, for each recipient. According to the IRS, associations must submit Form 1099-MISC to payees by February 1st. Then, associations must file the form with the IRS by March 1st.
To accomplish this, your association must download a printable 1099 form, fill it out, and mail it to the IRS. As for where to mail Form 1099-MISC, it depends on where your association is located. The IRS has three processing centers — one in Austin, TX, one in Kansas City, MO, and one in Ogden, UT. To know which address your association must send the form to, click here.
Errors to Watch Out For
Filing information returns can come as a challenge to many homeowners associations. Some mistakes you might commit include filing past the deadline and filing forms with incomplete or incorrect information. When these errors occur, your association could face monetary penalties.
The dollar amount of these penalties can vary from situation to situation. In recent years, various legislative acts increased the penalties for failing to file 1099 forms. Today, non-filing can cause your HOA to pay a fine of $270 for each 1099 form. If you intentionally disregard the requirements, the penalty increases to $550 per form. You may even face twice the amount of fines if you fail to submit the form to the IRS as well as fail to send a copy to the payee.
Therefore, if your HOA wants to avoid incurring these fines, make sure to keep an accurate record of all your expenditures, obtain your vendors’ TINs, and file the forms correctly and on time.
Keep Records, Hire a Professional
As you can see, filing Form 1099-MISC comes with a lot of obstacles.
One of the ways you can ensure correct and one-time filing, though, is to keep accurate records of all your association’s expenditures. Make sure to have a system so that you don’t lose track of your expenses. Remember to ask for your vendors’ TINs, too.
These tasks, though, are often easier said than done. For this reason, many homeowners associations turn to professional help. This can be in the form of an HOA management company or Certified Public Accountant. Some take matters into their own hands and invest in accounting or management software instead. The beauty of hiring an HOA management company, though, is that they will typically handle all the necessary filing. That includes sending Form 1099-MISC copies to payees.
For the best of both worlds, hire Clark Simson Miller. We offer remote HOA management services as well as HOA accounting services. Call us today at 865.315.7505 or contact us online to request a proposal.
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