Information reporting, such as on Forms 1099 or W-2, is one of the crucial components of a well-functioning tax system. Such information reporting both assists taxpayers in filing of their annual returns as well as informs the government of income earned by taxpayers. Broadly speaking, the IRS has placed the burden of information reporting on the payors but ultimately the requirement to report income falls on the recipient.
Much like with wage reporting, the Internal Revenue Code does not make the distinction between Non-Profit Organizations and For-Profit Organizations, thereby requiring many Non-Profit Organizations to file annual information returns. The most common form of information reporting for organizations (besides payroll) is the filing of Form 1099.
The most common types of reportable payments made by organizations which require reporting are
- Non-Employee Compensation
- These are payments to independent contractors made by the organization. These can include service providers like accountants and lawyers. Organizations should be sure that payees are independent contractors and not employees
- Payments for the use of property (typically including any CAM charges or Real Estate Taxes included as part of the lease) are subject to information reporting.
- Other Income
- Organizations that make other payments that may be taxable to the recipient (such as prizes, awards, or non-qualified scholarships) should report these as “Other Income”
One area that is unique to the Non-Profit Sector is the potential payment in relation to the mission of the organization. The Internal Revenue Code does have a somewhat broad definition of income, with income as “all income from whatever source derived” meaning “instances of undeniable accessions to wealth, clearly realized and over which taxpayers have complete dominion.” While some of these cases can be clear (wages, interest) others can be a bit more obtuse (certain fringe benefits, prizes, and awards). Where does a payment or benefit from an organization fit in – certainly if an organization is helping someone in need, the last thing they may want is to create a taxable burden on someone as a result.
Luckily, there is an exemption for these payments. The IRS considers payments from organizations generally to be “gifts” under IRC Section 102. The IRS has published several different revenue rulings (Rev. Rul. 2003-12, 99-44, INFO 2006-0027) which elaborate on this, but largely the payments are made because of “detached and disinterested generosity….out of affection, respect, admiration, charity of like impulses.” As such, the payments are “excluded from gross income” and “not subject to information reporting under 6041.” So long as the recipients are not required to perform any services or similar and the payments are made out of this generosity the payments should be both exempt from tax and information reporting.
Finally, a common question for many non-profit organizations relates to payments for foreign contractors. Most non-profits are familiar with the information reporting rules requiring Form 1099 to contractors, but when the payment is made to an overseas contractor (who typically will not have a Social Security Number) questions arise. While no one answer can be said, generally, payments made to a service provider who is providing the services outside of the US are not subject to US Taxation (as they are not Effectively Connected Income) and are not subject to reporting requirements. Organizations should obtain a Form W-8 BEN from these contractors, which is a certification that the payments are not Effectively Connected Income (e.g. performed in the US).
Other payments that are not for services (e.g. awards or prizes) or are performed by a non-resident individual in the US or are Effectively Connected Income are both taxable in the US and reportable payments. Such payments are reported on Form 1042-S and may be subject to withholding at the source, which can vary greatly depending on the nature of the payment and the citizenship of the recipient.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.