nonemployee compensation taxes

If the cash wages you pay farm workers are subject to social security and Medicare taxes, they are also subject to income tax withholding. Withhold income tax on noncash payments only if you and the employee agree to do so. The amount to withhold is figured on gross wages without taking out social security and Medicare taxes, union dues, insurance, etc. You can use one of several methods to determine the amount to withhold. The methods are described in Circular A.

Generally, you must withhold income tax from wages you pay an employee if the wages are more than the dollar value of the withholding allowances claimed for that pay period. Do not withhold income tax from the wages of an employee who, by filing Form W-4, certifies that he or she had no income tax liability last year and anticipates no liability for the current year.

In general, an employee can claim withholding allowances on Form W-4 equal to the number of exemptions the employee will be entitled to claim on his or her tax return. An employee may also be able to claim a special withholding allowance and allowances for estimated deductions and credits.

Circular A contains tables showing the correct amount of income tax you should withhold. It also contains additional information about income tax withholding. See chapter 21 for information about getting Circular A and Form W-4.

Report the income tax withheld on Form 943 at the same time the social security and Medicare taxes are reported. However, you may have to deposit withheld taxes before you file Form 943. See Reporting and Paying Employment Taxes, later.

Form W-4 for 1999. Farmers who have employees should make 1999 Forms W-4 available to their employees and encourage them to check their income tax withholding for 1999. Those employees who owed a large amount of tax or received a large refund for 1998 may want to file a new Form W-4.

Nonemployee compensation. Generally, you are not required to withhold tax on payments for services to individuals who are not your employees. However, you may be required to report these payments on Form 1099-MISC, Miscellaneous Income, and to withhold under the backup withholding rules, discussed next. See Information Returns in chapter 2 for information on Form 1099-MISC.


nonemployee compensation taxes

Form 1099 Reporting Requirements

You generally have until January 31 to prepare and mail 1099s to recipients. You've generally got until February 28 to mail the required copy to the IRS. This article isn't intended to provide all the details on filing 1099s. Rather, we want to make you aware of some frequently overlooked details. If you find you need to file some 1099s and haven't, you can get forms at your local office supply store. Many stores also have a software package that will make it easier to process the forms.

They've gone up. For information returns required to be filed on or after January 1, 2011, the penalties are:

  • If you file a correct return up to 30 days after the required filing date, the first-tier penalty is $30 per return, with a maximum of $250,000 ($75,000 for small businesses).

  • If the correct return is filed more than 30 days late but on or before August 1, the second-tier penalty of $60 per return applies, with a maximum of $500,000 ($200,000 for small businesses).

  • If the correct return is not filed on or before August 1, the third tier penalty of $100 applies ($1.5 million maximum; $500,000 for small businesses).
  • If the failure to file a return or to include the required information is due to intentional disregard of the rules, the above penalties don't apply. Instead, the penalty is the greater of $250 per return or 10% of the amount required to be reported on 1099-MISC and certain other returns. There is a de minimis exception, but it's fairly narrow. In addition, if you must file 250 or more information returns, you must file electronically. There are substantial penalties for failure to do so.

    There's a second penalty of $100 per statement for failure to furnish the statement to the payee. This penalty has a maximum of $1.5 million per year ($500,000 for small businesses). As with the penalties for failure to file with the IRS, the penalty is tiered--$30 (instead of $100) if corrected within 30 days the penalty is only $30 ($250,000 maximum, $75,000 for small businesses); if on or before August 1, $60 ($500,000 maximum, $200,000 for small businesses). For intentional disregard of the rules the penalty is the greater of $250 or 10% of the total amount required to be reported correctly.

    Clearly, failure to file even a few returns can be very costly.

    While we're on the subject of penalties, you can't avoid withholding, FICA, unemployment, etc. by giving a worker a 1099-MISC when they really should be classified as an employee and get a W-2. But you may be able to reduce your penalties for misclassifying a worker as an independent contractor by giving him or her a 1099. The rules are involved. Talk to your accountant or tax advisor.

    Forms You May Have to File

    1099-MISC. This is the one you're probably most familiar with. This is the form you use for independent contractors. Many businesses only consider those individuals who do work related to the purpose of the business. For example, a machine shop might give 1099s to a subcontractor who has his own shop. But you have to provide a 1099 to any business other than a corporation who performs services for your business. For example, the auto mechanic who repairs the company truck; the electrician who came in to add outlets in your office; etc. You must also send a 1099 to the person to whom you pay office or other rent. For this filing year, the old requirements apply. That is, you don't have to send out a 1099 on rental properties if you're not in the trade or business of renting property, and the controversial requirement to send a 1099 to providers of goods as well as services doesn't apply. That changes for payments made in 2011. Here's a list of other payments that might have to be reported on a 1099:

    • payments to attorneys (even if a corporation)

  • amounts paid to accountants, architects, contractors, engineers

  • commissions to nonemployee salespersons (even if subject to repayment)

  • travel, expense, etc. reimbursements to independent contractor for which the contractor did not account

  • exchanges of services between individuals (barter transactions)

  • fishing boat crew members proceeds

  • fish purchases for cash

  • health care services (even if a corporation)

  • nonqualified deferred compensation

  • fees paid by one professional to another, such as fee splitting

    Only report nonemployee payments on a 1099-MISC. If the individual is an employee, the amount should be reported on his or her W-2. For example, a bonus paid to an employee is reported on a W-2; a bonus to an independent contractor belongs on a 1099. (Amounts paid to the estate of a deceased employee are reportable on a 1099-MISC. Death benefits from nonqualified deferred compensation plans paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-MISC. Check the instructions.)

    You don't have to send a 1099-MISC to a party that provides you only with goods. (See the comment above.) For example, you buy auto parts from a local distributor and one of your employees repairs the vehicles. But a 1099 is required to an auto repair shop even if the value of the services is relatively small. For example, it's $2300 for the parts; $150 for the labor. The 1099-MISC should be for $2450. If state or local sales taxes are imposed on the service provider and you (as the buyer) pay them to the service provider, report them on the 1099. However, if sales taxes are imposed on you (as the buyer) and collected from you by the service provider, do not report the sales taxes.

    If you don't classify payments by vendor as well as by general ledger account, you should go through your records to see who you might owe a 1099. That can include the service that cleans the office; your attorney who's on retainer (or paid by hour); etc.

    You generally don't have to report payments made to a corporation. The exceptions are payments to attorneys, for medical services, and fish purchases for cash. In these cases even if the provider does business as a corporation, the payments are reportable. What about other providers? Don't know if the business is a corporation, LLC, sole proprietorship? Did the person provide goods or services? Sending a 1099-MISC where one is not required has no adverse consequences (just more paper). Many businesses, even large ones, send 1099s to every vendor.

    You must report fees paid by one professional to another, such as fee-splitting or referral fees. Report commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year. Fees paid to a nonemployee, including an independent contractor or travel reimbursement for which the nonemployee did not account to the payer, if the fee and reimbursement total at least $600.

    Report a fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to you (the payer), if the fee and the reimbursement total at least $600.

    When an escrow agent maintains owner-provided funds in an escrow account or a construction project, performs management and oversight functions relating to the construction project, and makes payments for the owner and the general contractor, the escrow agent must file Form 1099-MISC for reportable payments of $600 or more.

    The reporting threshold for nonemployee compensation, services, etc. and rents is $600. If the amount paid during the year is $600 or more, you owe the recipient a 1099-MISC. (The threshold is only $10 in the case of royalties.)

    For coin-operated amusements, if the arrangement between the owner of the amusement and the owner of the business establishment where the amusements are placed is a lease of the amusements or the amusement space, the owner of the amusements or the owner of the space, whoever makes the payments must report the lease payments in box 1 (Rents) if the total payments are at least $600.

    1099-INT. This form is for interest payments. It's easy to overlook this one. But there's a good chance the business made interest payments to a shareholder for a loan. The business may have made interest payments on funds borrowed from an angel investor or relative, on accounts payable, etc. The reporting threshold is $600 for such payments (it's $10 for banks, credit unions, etc.).

    1099-DIV. Regular (C) corporations that pay dividends have to report such amounts on a 1099-DIV. Whether or not a distribution is a dividend depends on a number of factors. Generally a payment from a C corporation's earnings and profits (similar to retained earnings) is a dividend. Dividends to a recipient of $10 or more are reportable. Liquidating dividends are reportable when they amount to $600 or more. (Under certain circumstances, distributions by an S corporation could be reportable dividends.)

    1099-A. You may have to report the acquisition or abandonment of secured property for each borrower if you lend money in connection with your trade or business and, in full or partial satisfaction of the debt, you acquire and interest in property that is security for the debt, or you have reason to know that the property has been abandoned. You don't have to be in the business of lending money to be subject to this reporting requirement. You don't have to file a 1099-A if tangible personal property is used solely for personal purposes. The reporting threshold is $600.

    1099-C. Report the cancellation of a debt of $500 or more owed to you if lending money is a significant trade or business for you. The lending of money is a significant trade or business if money is lent on a regular and continuing basis. The law contains a safe harbor. Generally if lending provides 10% or more of the organization's gross income, the lending of money is significant.

    8027. Employer's Annual Information Return of Tip Income and Allocated Tips. This reporting requirement applies to receipts from large food or beverage operations, tips reported by employees and allocated tips. Check with your accountant or tax adviser for the rules.

    1042. Use Form 1042S to report tax withheld on certain income of foreign persons, including nonresident aliens, foreign partnerhips and corporations, and foreign estates and trusts.

    Reporting period. Forms 1098, 1099, 3921, 3922, and W-2G are used to report amounts received, paid, credited, donated, transferred, or canceled (Form 1099-C) during the calendar year.

    Specific instructions. The IRS has some specific rules such as no dollar signs, no entry for zero amounts, etc. Using a software program to prepare the returns will automatically handle these issues. The programs are generally cheap and well worth it.

    Retention rules. Generally, keep copies of information returns filed with the IRS or have the ability to reconstruct the data for at least 3 year (4 for Form 1099-C) from the due date of the returns. Keep copies of information returns with backup withholding for 4 years.

    State reporting. You may also have to file state copies of 1099s. Check with the states where you do business or your tax advisor.

    Copyright 2010-2011 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536


    nonemployee compensation taxes

    NPS Pharmaceuticals, Inc.

    Nonemployee Director Deferred Compensation Program

    Article 1. Establishment, Purpose, and Duration

    1.1 Establishment of this Program. NPS Pharmaceuticals, Inc. (“NPS” or the “Company”) hereby establishes a deferred compensation program for Nonemployee Directors under the NPS Pharmaceuticals, Inc. 2005 Omnibus Incentive Plan (“Omnibus Plan”) to be known as the “NPS Pharmaceuticals, Inc. Nonemployee Director Deferred Compensation Program” (the “Program”), as set forth in this document.

    1.2 Purpose of this Program. The Company has implemented a compensation scheme for its Nonemployee Directors, which consists of the payment of annual retainer fees and meeting fees in the form of cash and equity and the award of nonretainer equity. A detailed description of Nonemployee Director Compensation in effect as of the effective date of this Program is attached hereto as Appendix A. The purpose of this Program is to advance the interests of the Company and its stockholders by enabling Nonemployee Directors to receive Deferred Stock Units in lieu of all or a portion of the Compensation they receive from the Company for annual retainer fees and meeting fees and to receive Deferred Stock Units for all of the Nonretainer Equity Compensation.

    1.3 Duration of this Program. This Program shall commence on May 12, 2005 and shall remain in effect, until terminated by the Board of Directors pursuant to Article 10.

    Article 2. Definitions

    Capitalized terms not otherwise defined in this Program or an Award Agreement between the Company and a Nonemployee Director will have the meanings set forth in the Omnibus Plan.

    For purposes of this Program, the following definitions will control:

    2.1 “Common Stock” means a share of common stock of the Company, par value of $.001 per share.

    2.2 “Compensation” means all remuneration payable to a Nonemployee Director for services to the Company as a Nonemployee Director, other than reimbursement for expenses and Nonretainer Equity Compensation, and shall include (a) retainer fees for service on the Board, (b) fees for serving as chairman of a committee of the Board, (c) fees for attendance at meetings of the Board and any committees thereof, (d) compensation for work performed in connection with service on a committee of the Board or at the request of the Board, any committee thereof or a member of the Company’s Chief Executive Office or the Chairman of the Board, and (e) any other kind or category of fees or payments which may be put into effect in the future.

    2.3 “Deferral Election” means an “Election to Defer” form completed by a Participant and filed with the Board that indicates the amount of his or her Compensation that is or will be deferred under this Program.

    2.4 “Deferrals” means, individually or collectively, amounts deferred under this Program, whether deferred on an elective or mandatory basis.

    2.5 “Deferred Stock Unit” represents an obligation of the Company to issue a share of Common Stock to a Nonemployee Director in the future.

    2.6 “Disabled” or “Disability” means a Participant (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Participant’s employer.

    2.7 “Discretionary Noncash Compensation” means the portion of a Nonemployee Director’s Compensation, which the Nonemployee Director elects to have paid in the form of Deferred Stock Units pursuant to Article 5.

    2.8 “Fair Market Value” for purposes of this Program means the closing price of a share of Common Stock as reported on the Nasdaq Stock Market.

    2.9 “Mandatory Noncash Compensation” means the portion of a Nonemployee Director’s Compensation, which must be paid in the form of Deferred Stock Units pursuant to Article 5.

    2.10 “Nonemployee Director Stock Ownership Guidelines” means the stock ownership guidelines applicable to Nonemployee Directors adopted by the Board on March 28, 2005.

    2.11 “Nonretainer Equity Compensation” means the portion of remuneration to be awarded to Nonemployee Directors solely in the form of Deferred Stock Units for service on the Board in general and is not tied to committee appointments, meeting attendance or specific services.

    2.12 “Participant” means a Nonemployee Director of the Company who has an outstanding Deferral under this Program.

    2.13 “Specified Participant” means a Participant described in Code Section 416(i) without regard to paragraph (5) thereof.

    Article 3. Administration

    3.1 General. The Program shall be administered by or under the direction of the Board unless and until the Board delegates administration to a committee of the Board. The Board may employ attorneys, consultants, accountants, agents, and other individuals, any of whom may be an Employee, and the Board, the Company, and its officers and Directors shall be entitled to rely upon the advice, opinions, or valuations of any such individuals. All actions taken and all interpretations and determinations made by the Board shall be final and binding upon the Participants, the Company, and all other interested individuals.

    3.2 Authority of the Board. The Board shall have full and exclusive discretionary power to interpret the terms and the intent of this Program and any Award Agreement or other agreement or document ancillary to or in connection with this Program, to determine eligibility for Awards and to adopt such rules, regulations, forms, instruments, and guidelines for administering this Program as the Board may deem necessary or proper. Such authority shall include, but not be limited to, selecting Award recipients, establishing all Award terms and conditions, including the terms and conditions set forth in Award Agreements, granting Awards as an alternative to or as the form of payment for grants or rights earned or due under compensation plans or arrangements of the Company, construing any ambiguous

    provision of the Program or any Award Agreement, and adopting modifications and amendments to this Program or any Award Agreement, including without limitation, any that are necessary to comply with the laws of the countries and other jurisdictions in which the Company, its Affiliates, and/or its Subsidiaries operate.

    Article 4. Participation

    Every Nonemployee Director shall participate in this Program.

    Article 5. Deferral of Compensation

    5.1 Deferral of Compensation. The amount each Nonemployee Director shall receive of his or her Compensation in the form of Deferred Stock Units (“Mandatory Noncash Compensation”) and whether a Nonemployee Director may elect to have none, fifty percent (50%) or one hundred percent (100%) of his or her Compensation otherwise payable in cash, if any, to be paid in Deferred Stock Units (“Discretionary Noncash Compensation”) shall depend on whether the Nonemployee Director is in compliance with the Nonemployee Director Stock Ownership Guidelines as of the end of the year prior to the year in which such Compensation would otherwise be earned, as follows:

    5.2 Issuance of Deferred Stock Units.

    If the 15 th is a weekend or holiday, then the Deferred Stock Units will be valued and awarded on the next business day.

    The number of Deferred Stock Units issuable to a Nonemployee Director for meeting fees shall be equal to the quotient obtained by dividing the total meeting fees payable in Deferred Stock Units by the Fair Market Value of a share of Common Stock on the date such fees are due and payable. Provided, however, that for purposes of determining the number of Deferred Stock Units issuable for the first quarter of 2005, the valuation date shall be the Fair Market Value on May 12, 2005, the effective date of the Program.

    5.3 Deferral of Nonretainer Equity Compensation.

    5.4 Deferral Elections. Subject to paragraph (d) below, all Deferral Elections permitted by Section 5.1 shall be irrevocable, shall be made on an “Election to Defer” form as prescribed by the Board from time to time, and shall comply with the following requirements.

    5.5 Subsequent Deferral Elections. This Program does not permit a subsequent Deferral Election.

    5.6 Number of Deferred Stock Units. The number of Deferred Stock Units to be granted in connection with a Participant’s Mandatory Noncash Compensation and/or Discretionary Noncash Compensation pursuant to this Article 5 shall equal the cash portion of the Compensation being deferred, divided by the Fair Market Value of a share of Common Stock on the date such cash Compensation would have been otherwise paid, except for its Deferral.

    Article 6. Deferred Stock Units

    6.1 Award Agreement. Each Nonemployee Director who receives Deferred Stock Units shall execute and deliver to the Company an agreement evidencing acceptance of the terms, conditions and restrictions applicable to such Deferred Stock Units.

    6.2 Dividends. If the Company pays a cash dividend with respect to the Common Stock at any time while Deferred Stock Units are credited to a Nonemployee Director’s account, there shall be credited to the Nonemployee Director’s account additional Deferred Stock Units equal to the cash dividend the Nonemployee Director would have received had he or she been the actual owner of shares of Common Stock equal to the number of Deferred Stock Units then credited to the Nonemployee Director’s account, divided by the Fair Market Value of one share of Common Stock on the dividend payment date.

    6.3 Unfunded and Nonassignable. The Company’s obligation with respect to Deferred Stock Units shall not be funded or secured in any manner, nor shall a Nonemployee Director’s right to receive payment be assignable or transferable, voluntarily or involuntarily, except as expressly provided herein.

    6.4 Voting Rights. A Nonemployee Director shall not be entitled to any voting or other stockholder rights as a result of the credit of Deferred Stock Units to the Nonemployee Director’s account until certificates representing shares of Common Stock are delivered to the Nonemployee Director (or his or her designated beneficiary or estate) hereunder.

    Article 7. Distributions

    7.1 Form of Distribution. All distributions of Deferrals shall be in the form of Common Stock.

    7.2 Distributions Pursuant to Deferral Elections. Compensation deferred under this Program may not be distributed earlier than:

    7.3 Disability. A distribution payable by reason of a Participant’s Disability shall be paid as soon as practicable following the date the Participant’s Disability occurs.

    7.4 Death. If a Participant dies before complete distribution of his or her Deferrals under this Program has occurred, the Participant’s undistributed Deferrals shall be paid in a single distribution of Common Stock.

    7.5 No Acceleration of Distributions. Notwithstanding anything to the contrary herein, this Program does not permit the acceleration of the time or schedule of any distribution under this Program, except as provided by the Secretary of the United States Treasury for purposes of meeting the requirements of Code Section 409A.

    Article 8. Source of Shares of Common Stock Issuable Under this Program

    The Shares of Common Stock payable in settlement of Deferred Stock Units to Nonemployee Directors under this Program shall be paid from shares of Common Stock reserved or available for issuance under the Omnibus Plan or any other plan approved by stockholders under which Nonemployee Directors are eligible to be granted shares.

    Article 9. Amendment

    This Program may be amended at any time and from time to time by resolution of the Board as the Board shall deem advisable; provided, however, that no amendment shall become effective without stockholder approval if such stockholder approval is required by law, rule or regulation and no such amendment shall result in a failure to meet the requirements of Code Section 409A. No amendment of this Program shall materially and adversely affect any right of any Participant with respect to any Deferred Stock Units theretofore credited without such Participant’s written consent, except that the Board may amend this Program, a Deferral Election, or any Deferrals, to take effect retroactively or otherwise, as deemed necessary or advisable for the purpose of conforming this Program, a Deferral Election, or any Deferrals to any present or future law relating to plans of this or similar nature (including, but not limited to, Code Section 409A), and to the administrative regulations and rulings promulgated thereunder.

    Article 10. Termination

    This Program shall terminate upon the adoption of a resolution of the Board terminating this Program. No termination of this Program shall materially and/or adversely affect any of the rights or obligations of any Nonemployee Director without his or her consent with respect to any Deferred Stock Units theretofore credited under this Program. In addition, no such termination shall result in a failure to meet the requirements of Code Section 409A.

    Article 11. Inclusion in Income

    If at any time during a taxable year this Program fails to meet the requirements of a nonqualified deferred compensation plan pursuant to the Internal Revenue Code and Treasury regulations thereunder and results in the assessment of the additional tax and/or interest under Code Section 409A, all Compensation deferred under this Program to which such additional tax and/or interest is applied shall be distributed in a single sum as soon as practicable.

    Article 12. Tax Withholding

    12.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require the Participant or beneficiary to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Agreement.

    12.2 Share Withholding. With respect to withholding required upon any other taxable event arising as a result of the DSUs granted hereunder, the Participant may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be withheld on the transaction. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

    Article 13. Miscellaneous Provisions

    13.1 Neither this Program nor any action taken hereunder shall be construed as giving any Nonemployee Director any right to be retained in the service of the Company.

    13.2 A Participant’s rights and interest under this Program may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a Participant’s death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Participant in this Program shall be subject to any obligation or liability of such Participant.

    13.3 No shares of Common Stock shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign securities, securities exchange and other applicable laws and requirements.

    13.4 The expenses of this Program shall be borne by the Company.

    13.5 This Program shall be unfunded. The Company shall not be required to establish any special or separate fund or reserve or to make any other segregation of assets to assure the issuance of shares of Common Stock hereunder.

    13.6 By accepting any Deferred Stock Units hereunder, each Participant and each person claiming under or through him or her shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under this Program by the Company or the Board.

    13.7 The appropriate officers of the Company shall cause to be filed any registration statement required by the Securities Act of 1933, as amended, and any reports, returns or other information regarding any shares of Common Stock issued pursuant hereto as may be required by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any other applicable statute, rule or regulation.

    13.8 The provisions of this Program shall be governed by and construed in accordance with the laws of the State of Delaware.

    13.9 Headings are given to the sections of this Program solely as a convenience to facilitate reference. Such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Program or any provisions thereof. The use of the singular shall also include within its meaning the plural, where appropriate, and vice versa.

    Nonemployee Director Deferred Compensation Program