Tax Reportable Payments
WHAT ARE TAX REPORTABLE PAYMENTS
Reportable payments are payments to or on behalf of an individual that must be “reported” to the government as income received. Reportable payments are tied to the relationship the individual has with the paying entity as detailed below in the section on payment classification.
Generally, all payments to, or on behalf of, the individual are taxable and reportable unless there is an Internal Revenue Service (IRS) rule that exempts the payment from taxation or excludes the payment from taxable reportable income.
Reportable items can include, but are not limited to, lump sum payments, gift cards, gift certificates, living allowances, etc. They could also be the value of benefits provided in which the recipient gains personal use such as personal use of a company vehicle.
“Reported” means the paying entity is required to and will provide a tax statement at calendar year-end to the payment recipient and also send the data to the government.
Most regulations on excludible rules are tied to service worker payments (employee or independent contractor payments). You can reference IRS publications IRS Publication 15-B “Employer’s Tax Guide to Fringe Benefits” and the IRS FSLG Fringe Benefit Guide for more information.
The main tax reportable payments at the University of Wisconsin are services, medical services (including corporations), legal settlements, rents, royalties, human subjects, prizes and awards, scholarships/fellowships)
There are two groups of payment classifications:
- Payments in which the individual provides “services” OR
- Payments where no services are rendered.
The payor recognizes the following payment classifications:
- Services (Employee or Independent Contractor)
- Research Subject Payments
Payment classification is based on the activity and relationship the individual has with the payor in order to receive the payment, NOT what a payment is called. For example: “Stipend” is just a word that means a payment but what the person does to receive the stipend or payment defines the payment classification.
Accurate payment classification is very important as misclassification of payments can lead to payor risk for penalties as well as potential disallowance of funding for programs.
The main area typically reviewed for misclassification are employee versus independent contractor.
If at any time you are unsure of the payment classification, you should contact the UW Tax Compliance Office. If the payment classification is not accurate, all remaining tax and reporting determinations will be incorrect.
|Type of Payment||Tax Reportable?||Comments|
|Research Study Participants||Yes||Payments to Research Subjects must be made following the policies and procedures found on Policy 103-Payments to Human Subjects|
|Royalty Payments||Yes||Royalties (Definition, Payment Processing, and Tax Reporting).|
|Non-U.S. Source Income||No||Non-U.S. Source Income payments are exempt from tax withholding and reporting. For details on what constitutes Non-U.S. Source Income payments, please refer to Non-U.S. Source Income (Foreign Source Income).|
Processing Tax Reportable Payments
Per the Internal Revenue Service (IRS), tax reportable payments must be made through a payment mechanism that captures federally mandated tax reporting information for tax reporting at the end of the calendar year. Tax reportable payment account codes includes services, medical services (including corporations), legal settlements, rents, royalties, human subjects, and prizes and awards. Please review the list of tax reportable payment account codes in the document at (1099-MISC and 1042-S Tax Reportable Payments by Account Codes).
In order for the information to be captured for the federally mandated tax reporting at the end of the calendar year, all tax reportable payments to non-employees must be processed through either of the following mechanisms:
- Payment to Individual Report (PIR)
- Direct Payment (DP) Form
- Purchasing Services (Purchase Order, Academic Support Service Agreement, etc.).
- Purchasing Card (P-Card)Note: Effective January 1, 2012, organizations are no longer required to report on tax reportable payments made with a credit card. As a result, the University will no longer be required to file an IRS Form 1099-MISC for taxable payments made with Purchasing Cards. Payment settlement entities, (e.g. acquirers and third-party settlement organizations) will instead be required to report on all credit card transactions settled by their networks. For further details, see General FAQs on Payment Card and Third Party Network Transactions.Effective January 1, 2012, services and all other tax reportable payments are allowable on the UW-Madison Purchasing Cards provided all applicable Purchasing Card Policies and Procedures are followed.
The following are not authorized methods for making payments of tax reportable payments:
- Personal FundsTax reportable payments are not to be made by an employee on his/her personal funds. Reimbursement requests submitted by employees for tax reportable transactions processed through an unauthorized method (personal funds, etc.) will not be honored. This includes requests submitted though e-Reimbursement. If an employee makes a payment using an unauthorized method of payment (personal funds, etc.), it is the individual’s responsibility to obtain a credit from the vendor and process the payment through an authorized method (PIR or DP or Purchasing Card).
- E-reimbursement System
WHAT ACCOUNT CODES TO USE TO PROCESS TAX REPORTABLE PAYMENTS
Tax reportable account codes to be used are based on the type of payment being made. A list of the account codes, the expense description, and whether or not the payment is tax reportable is detailed at 1099-MISC and 1042-S Tax Reportable Payments by Account Codes.
CAN PAYMENTS BE MADE AND REPORTED TO OTHER THAN THE SERVICE PROVIDER
Tax reportable payments (services, awards, royalties, etc.) must be made and tax reported to the person or entity that performed the services, earned the award, is the owner of the royalty, etc. The only exception is when:
- There is an official written signed contact whereby the individual performing a service(s) is a representative of an entity (company, corporation, etc.) and the payment and tax reporting are to be made to the entity for the individual’s service(s).
Tax reportable payments (services, awards, royalties, etc.) cannot be donated to a charitable organization by the UW in lieu of paying the payment owner. Tax reportable payments must be made, and tax reported to the person or entity that performed the services, earned the award, is the owner of the royalty, etc.
RESOLVING TAX ISSUES PRIOR TO PAYMENT
Before payment is requested, it is important that individuals be informed of the possibility that taxes may be withheld and payments may be reported to the Internal Revenue Service and the Wisconsin Department of Revenue.
Accounting Services has developed a document summarizing the potential tax implication of payments to individuals. A copy of this document, entitled “Important Tax Information”, is provided in Appendix 2. Be sure to provide a copy to all individuals to whom you make payments for services, rents, royalties, prizes, or awards. If an individual has questions regarding the content of the document, he or she should be referred to their Dean’s Office or the Accounting Services Tax Compliance Office.
BACKUP WITHHOLDING FOR TAX REPORTABLE PAYMENTS TO U.S. TAX RESIDENTS
What is Backup Withholding?
- Government entities that make certain payments are required to withhold income tax of 24% from these payments if the payee is not exempt from backup withholding and fails to furnish correct taxpayer identification number (TIN). Backup withholding does not apply to wages or pension payments.
- “Missing” Taxpayer Identification Number: A taxpayer identification number is considered “missing” whenever (1) the TIN is not provided, (2) the TIN has more or less than nine digits, or (3) the TIN includes an alpha character in one or more of its nine positions.
- IRS Publication 15 provides additional information regarding which payments are subject to backup withholding.
Payments that may be subject to backup withholding include interest, dividends, rents, royalties, nonemployee compensation, and certain other payments including broker and barter exchange transactions.
Tax reportable payments to U.S. residents (non-employee services, prizes and awards, rents, and royalties) are generally not subject to federal tax withholding. However, withholding will apply at the rate of 24% (Backup Withholding) if any of the following apply:
- Payment recipient fails to provide a U.S. Taxpayer Identification Number (Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), Federal Employer Identification Number (FEIN or EIN),
- Internal Revenue Service notifies Accounting Services to begin withholding for the taxpayer due to incorrect U.S. Taxpayer Identification Number, or
- IRS W-9 form is not completed, signed, and submitted prior to the payment
The State of Wisconsin does not require backup withholding when the recipient’s U.S. Taxpayer Identification Number is not provided. However, withholding of state tax may apply to payments made for entertainment or public speaking services. See Entertainers for details.
How to Complete the PIR when 24% Backup Withholding is required
- Complete the Payment to Individual Report (PIR) or Direct Payment (DP) Form
- On the “Enter Payment Information” tab of the digital form:
- In the Purpose of Payment section, in addition to the text explaining the business purpose for the payment, enter the reason for withholding the 24% backup withholding. For example, “Payment recipient refused to provide an SSN.”
- In the Payee Information section, select “Yes” for the third question “Is the payee a performer or public speaker who is receiving at least $7,000 and is not a WI resident?”
This will add the Entertainer Tax Withholding section will be added (row 67, after the Payee Mailing Address section), and will add the Wisconsin Department of Revenue section to the DP/PIR form.
- In the Entertainer Tax Withholding section, select “Yes” for “Does the payee have a DOR letter granting a rate lower than 6%?”
- Also in the Entertainer Tax Withholding section, enter “24” for the percentage granted by the DOR letter.
This will calculate the backup tax withholding amount and also enter the funding string(s) for you in the DOR section.
- On the printed DP/PIR form:
- In the box with the words “Dept of Revenue”, please cross out the words “Dept of Revenue” and enter the words “University of Wisconsin System”. Also, on the right side of the box, cross out the number “514788” and enter the number “507013”.
- You can ignore the W-9 and WT-11 forms in the Required Forms section. These forms are not required for payments with Backup Withholding.
- Process the payment form using the normal UW procedures.Once the payment form has all the required approvals please forward it directly to the Tax Compliance Office (Jose A. Carus, Jr., Tax Compliance Manager, 21 North Park Street, Suite 5301, Room 5352, Madison, Wisconsin 53715-1218).
REFUNDS OF OVER WITHHOLDING
If the individual believes taxes were withheld from a payment in error, he or she should be instructed to contact the Accounting Services Tax Compliance Office at 262-0582. If it is determined that taxes were withheld in error, the Accounting Services Tax Compliance Office will issue a refund check to the individual. EXCEPTION: If the error is found after the end of a calendar year that year or for a prior calendar year payment, it will not be possible for the Accounting Services Tax Compliance Office to obtain a refund for the overpayment from the IRS and issue a check to the individual. The individual would then be required to file a tax return and obtain a refund directly from the IRS. It is, therefore, very important that vendors contact Accounting Services Tax Compliance regarding potential errors immediately especially when payment is made near the end of a calendar year. These errors should be reported to the Accounting Services Tax Compliance Office no later than December 31.
Reporting Tax Reportable Payments
HOW ARE TAX REPORTABLE PAYMENTS REPORTED?
1099-MISC REPORTING (PAYMENTS TO U.S. PERSONS)
- The UW reports tax reportable payments on Form 1099-MISC to the taxpayer, the Wisconsin Department of Revenue, and the Internal Revenue Service.
- Total payments to a taxpayer are summed by category (services, prizes and awards, rent, and royalties) at the end of each calendar year. If payments in any category reach the UW reporting level shown below, a 1099-MISC is produced and payments are reported to tax authorities.
- The limits below are determined at the end of each calendar year by consolidating all payments made by all UW institutions.
- Each year, Accounting Services prepares and mails all 1099-MISC forms no later than January 31st as required by the Internal Revenue Service (IRS) regulations.
The following chart lists the types of tax reportable payments to:
- U.S. Persons (U.S. Citizens, Permanent Residents, resident per the Substantial Presence Test)
- U.S. Entities (sole proprietorships, limited liability companies, and partnerships)
Reporting Requirements (1099-MISC)
|Type of Payment||Federal Law||State Law||UW Reporting Level|
|Services (Independent Contractors)||$600||$600||$600|
|Prizes and Awards||$600||$600||$600|
|Royalties||$ 10||$100||$ 10|
|Scholarships/Fellowships||Payments are tax reportable to recipient, but none are reportable on Form 1099-MISC. These payment must be processed per guidelines posted at Payments To Students.|
|Services (Employees)||All employees payments must follow policy at How to make employee payments.|
|Business Purpose Documented Travel not included in the services payment||Not reportable. Must be processed through the UW E-Reimbursement System (Accountable Plan). Must have a legitimate and documented UW business purpose.|
An IRS Form W-9 is required when making tax reportable payments as the UW is required to obtain the following information on all potentially reportable payments:
- Legal name
- Permanent mailing address
- U.S. Taxpayer Identification Number (Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), or Federal Employer Identification Number (FEIN or EIN)
Sufficient description about the payment is necessary so the correct classification may be determined. This information is required for all payments on reportable categories (services, prizes and awards, rent, royalties) listed above, regardless of amount. If no U. S. Taxpayer Identification Number is provided, payments may be subject to Backup Withholding.
1042-S Reporting–Payments to Nonresident Aliens (NRA)
An IRS Form W-8BEN (Individuals) or W-8BEN –E (Entities) is required when making tax reportable payments to Nonresident Aliens (NRA).
All payments to NRA’s, which represent compensation for services, rent, royalties, prizes and awards, training stipends, scholarships, and fellowships are reported to the individual and the Internal Revenue Service (IRS) on Form 1042-S regardless of amount.
Unlike the 1099-MISC for U.S. Persons, there is no $600 limit for 1042-S reporting purposes. All payment amounts to Nonresident Aliens (NRA) must be reported on the 1042-S at the end of the calendar year.
All payments to NRA’s, regardless of amount, must be processed on the Payment to Individual Report (PIR).
All payments to NRA’s, regardless of amount, must include certain required documentation and are subject to immigration and visa restrictions as outlined in (Process and Document Flowchart for Non-Scholarship/Fellowship Payments. Includes U.S. Individual Taxpayer Identification Number (ITIN) application process).
All payments reportable on Form 1042-S require a permanent mailing address and country of residence on the Payment to Individual Report (PIR).
If the individual is claiming exemption or a special withholding rate for non-scholarship/fellowship payments, the IRS Form 8233 must be completed, signed, and attached.
The 1042-S forms will be prepared and mailed by Accounting Services no later than March 15 of each calendar year.
A Nonresident Alien (NRA) is an individual whose residence is not within the United States and who is not a U.S. citizen. A Resident Alien is an individual who is a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card” test. Alternatively, an alien is considered a U.S. resident if the individual meets the “substantial presence” test for the calendar year. Under this test, the individual must be physically present in the United States or present at least:
- 31 days during the current calendar year, AND
- 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year but only 1/3 the number of days of presence in the first preceding year and only 1/6 the number of days in the second preceding year.
However, individuals present in the U.S. under a J or Q non-student visa are considered “exempt individuals” until they have been present for two calendar years out of the last six years. Therefore, they do not begin to count days of presence toward the presence test until they are no longer “exempt individuals”. Students present in the U.S. under F, J, M or Q student visas are considered “exempt individuals” until they have been in the U.S. for any part of five calendar years. For more information on resident and nonresident status, the tests for residence, and the exceptions to them see the IRS Publication 519, U.S. Tax Guide for Aliens. You may call the Internal Revenue Service at 1-800-829-3676 (1-800-TAX-FORM) for a copy or visit the IRS page.
All categories of J-1 exchange visitors are eligible for social security numbers and should apply at a Social Security Administration office or at a U.S. Embassy or Consulate. F-1 and J-1 students who are not employed are not eligible for social security numbers, and should apply for an ITIN by filing IRS Form W-7 at a local IRS office or at through the UW Tax Compliance Office. Contact a Dean’s office or Accounting Services for more information. After application has been made for either a social security number or ITIN, but the number has not yet been received, enter “applied for” and the date of application on the PIR. When the individual receives the number from Social Security Administration or IRS, they must provide the number to their paying department and the Accounting Services Tax Compliance Office.
For more information on Visa requirements and the tax issues to consider when paying non-resident aliens, see UW-Madison Handbook “Payments to Foreign Nationals“.
Year-End Tax Reportable Responsibilities
All income received by taxpayers is subject to IRS tax reporting requirements.
To comply with IRS tax reporting requirements, the UW gathers the taxpayer’s name, home mailing address, and taxpayer identification numbers for all taxable payments made. At the end of each calendar year, the UW sends an IRS Form 1099-MISC to U.S. Residents or a Form 1042-S to nonresident aliens (NRA) as specified by IRS tax reporting requirements/regulations.
Income on the 1099-MISC forms (U.S. Residents) includes:
- Compensation for Independent Personal Services (Nonemployee Compensation). Only Nonemployee Compensation payments totaling $600 or more are reported on the 1099-MISC forms. This $600 limit is determined at the end of each calendar year by consolidating all payments made by all UW institutions.
- All Rents, Royalties, Other Income.Note: 1099-MISC forms must be provided to the payment recipient on or before February 1st of each year for the income received in the preceding calendar year.
Income on the 1042-S forms (Nonresident Aliens) includes:
- All Compensation for Independent Personal Services, Scholarships/Fellowships, Royalties, and Other Income.Note: 1042-S forms must be provided to the payment recipient on or before March 15th of each year for the income received in the preceding calendar year.
Payment recipients should refer to the instructions on the IRS tax forms that they are required to complete (1040, 1040EZ, 1040-NR for the non-resident aliens, etc.) and other associated IRS forms/publications that meet the individual’s filing situation. IRS forms, instructions, and publications can be obtained at the IRS web page (IRS.GOV).
Questions regarding tax filing and completion of year-end tax forms should be addressed through the IRS or through the individual’s tax preparation professional. Questions regarding tax filing and tax form completion should not be addressed to the University of Wisconsin because legal liability prohibits UW employees from giving such advice.
Withholding of Federal Tax on Payments to Non Resident Aliens (NRA)
Tax reportable payments to nonresident aliens which are compensation for services, rent, royalties, prizes and awards, training stipends, scholarships, and fellowships are subject to federal tax withholding unless exempted by federal law or treaty. Following are descriptions of income that may be exempt from withholding:
- Travel Reimbursement (Accountable Plan)
- Non-U.S. Source Income (Payments to Non-Resident Aliens for work performed Outside the U.S.)
- Exemptions by Tax Treaty
Exemptions by Tax Treaty
Income may be exempt under a tax treaty between the United States and the payee’s country of residence or citizenship. Withholding will not apply if the payee files form W-8BEN (for scholarships/fellowships) or 8233 (for non-scholarships/fellowships) (described below) with the University. The W-8BEN and 8233 forms must have a valid U.S. Taxpayer Identification Number (TIN) for them to be considered complete and valid. Without a U.S. TIN no tax treaty can be granted and appropriate taxes will be withheld (14% for scholarships/fellowships, and 30% all non-scholarship/fellowship payments).
Form 8233 is used by Nonresident Aliens (NRA) to claim exemption from withholding on compensation for services when the exemption is based on a tax treaty. The form is available at the IRS. The Form 8233 is completed by the NRA claiming exemption. Before accepting this form, review it for completion and accuracy. If the form is incomplete, the exemption from withholding will be denied. The form is considered incomplete without a valid U.S. Taxpayer Identification Number. If you know of any reason that any of the statements on the form are false, do not accept the form. The UW is not federally required to give treaty benefits.
Completed 8233 forms should be attached to the payment request form. A new form must be completed each calendar year. If a form is not filed, taxes will be withheld unless the payment is otherwise exempt and the exemption is supported by official documents from the IRS.
If the individual has a U.S. Taxpayer Identification Number (Social Security Number [SSN], Individual Taxpayer Identification Number [ITIN], Federal Employer Identification Number [FEIN or EIN]), it should be entered on the form. If the number has been applied for, but has not yet been received, enter “applied for” and the date of the application in the space provided. When the individual receives the number they should send it to Accounting Services Tax Compliance Office, 21 N Park St., Suite 5352, Madison, WI 53715-1218. Individuals who do not have a U.S. Taxpayer Identification Number cannot be paid until an application for a number has been made and documentation provided to the UW. For more information, contact your Dean’s Office or Accounting Services Tax Compliance Office.
Form W-8BEN is used to claim exemption from withholding on payments for scholarships/fellowships. It is also used to claim exemption from withholding or a reduced withholding rate on payments for rents or royalties due to the existence of a tax treaty. A U.S. Taxpayer Identification Number is required. Completed W-8BEN forms must be attached to the payment request form. A new form must be completed each calendar year. If a form is not filed, taxes will be withheld unless the payment is otherwise exempt and the exemption is supported by official documents from the IRS.