SECTION OVERVIEW AND POLICIES

This section provides Business Units with guidance on how to determine the federal reportability of payments as well as how to process payments subject to federal reporting, including payments for legal settlements, judgments, and awards.

Determining Federal Reportability of Payments

SECTION OVERVIEW AND POLICIES

This section provides Business Units with information on the type of payments that must be reported to the Internal Revenue Services (IRS).

The IRS requires the annual reporting of certain payments made to vendors and payees. Business Units play a vital role in helping New York State comply with these IRS requirements by ensuring payments are properly reported.

DETERMINING THE TYPE OF PAYMENTS THAT MUST BE REPORTED TO THE IRS

Business Units must consider the following information in determining if a payment is subject to IRS reporting.

1. What is the payee’s business structure?
   1. Payments made to individuals (sole proprietorships), partnerships, limited liability companies, associations, and estates/trusts are subject to IRS federal reporting.
   2. Payments made to corporations, including professional corporations, tax exempt entities, and governmental entities are not subject to federal reporting. The following exceptions to this rule require federal reporting for:
      • All medical/healthcare services, except services from tax exempt hospitals or extended care facilities
      • All attorney services except for real estate transactions.
2. What is the payment for?
   Transactions that are subject to reporting include the following types of payments in aggregate amounts of $600 or more during a single calendar year:

Types of Payments	Payment Description
Client Payroll/Work for Pay	Payments from human service related agencies to wards of the state for services provided in state workshop program (e.g., shelter workshops)
Hospital/Medical Payments	Payments to any entity for medical or healthcare services, except for payments to a tax-exempt hospital or extended care facility or to a hospital or extended care facility owned and operated by the United States (or its possessions), a state, the District of Columbia, or any of their political subdivisions, agencies, or instrumentalities
Interest	Payments for interest paid on late payments; prompt contracting interest; interest on leases, loans and land claims; interest associated with a settlement agreement
Jury Payment	Payments to jurors for amounts that are not compensated by their employers
Life Insurance for Military Personnel	Payments from the Division of Military and Naval Affairs to state military personnel for reimbursement of life insurance premiums over $50,000
Loan Forgiveness	Grants from the Higher Education Service Corporation to attorneys, social workers, child care providers, and nursing teachers for paying their student loans
Non-employee Services	Payments for personal services rendered by someone, other than a corporation (except for attorneys), who is not an employee. Non-employee compensation includes fees for services, prizes, and awards for services rendered
Payments made pursuant to settlements	Payments for damages: Non-physical injuries or sickness Property loss or damage Wrongful conviction/termination Breach of contract (not involving a physical injury) Compensatory damages for non-physical injuries or sickness (e.g., employment discrimination, defamation, or emotional distress) Other damages
Prizes and Awards	Payments for awards and prizes (not related to scholarship or fellowship) where the payee was selected without action on his or her part; payee is not required to render services; and the payee did not transfer the payment to a government or tax-exempt organization
Rent	Payments for renting space or equipment
Settlement payments directly to attorneys	Payments made directly to an attorney for settlements or judgments

Business Units do not have to report the following types of payments as they are not subject to reporting:

• Goods/products, utilities (gas, electric, and telephone), freight, and storage.
• Certain payments made to a claimant in the settlement of claims for a physical injury. These include the compensation for:
  • Personal physical injury or physical sickness
  • Emotional distress (only when accompanied by physical sickness)
  • Out of pocket medical expenses
  • Attorneys’ fees and costs associated with the recovery of nontaxable physical injury payments.

For information on how to process reportable and non-reportable transactions, please see Section 5.K – Processing Payments Subject to Federal Reporting of this Chapter.

Please contact OSC’s Bureau of State Expenditures Federal Reporting unit at (518) 486-4602 if you have any questions.

Processing Payments Subject to Federal Reporting

SECTION OVERVIEW AND POLICIES

This section provides Business Units with information on how to process payments subject to federal reporting within and outside of the Statewide Financial System (SFS).

The IRS requires the annual reporting of certain payments made to vendors and payees. Generally, aggregate payments to the same payee totaling over $600 in a single calendar year must be reported to the payee via a Form 1099 (information return) and a copy must be filed with the Internal Revenue Service (IRS). Business Units play a vital role in helping New York State comply with these IRS regulations by ensuring vouchers accurately identify the amount that is subject to 1099 reporting, and by classifying the reportable amount for the appropriate withholding class. If New York State does not comply with the IRS regulations, the IRS will assess substantial penalties against the State. The Office of the State Comptroller (OSC) will assess these penalties against a Business Unit that did not comply with the regulation.

OSC’s Bureau of State Expenditures (BSE) will produce and send Form 1099 to vendors and the IRS for payments processed within the SFS using regular vendor IDs. In addition, based on an agreement with the Business Unit, BSE will produce and send Form 1099 to vendors for payments processed within the SFS using a single payment vendor ID or for certain payments processed outside of SFS (i.e., using a sole custody account).

PROCESSING PAYMENTS SUBJECT TO FEDERAL REPORTING

Process and Transaction Preparation:

For BSE to create and file Forms 1099 for payments processed using regular Vendor IDs, Business Units need to code vouchers with the appropriate “Withholding Class” code outlined in the table below. To facilitate the reporting of the interest payments, Business Units must use the proper account code as listed in the table later in this section.

Business Units that make reportable payments outside the SFS (i.e., using a sole custody account), or make reportable payments within the SFS using a single payment Vendor ID, and wish to use OSC to file informational returns must provide the tax reporting information to BSE’s Federal Reporting Unit ([email protected]) using the format in this template.

Business Units that make reportable payments from sole custody accounts and do not wish to use OSC to file information returns are required to comply with IRS filing requirements. In this situation, the Business Unit must report payment information directly to the IRS under the Business Unit’s own employer identification number.

Business Unit who use the State’s EIN must use a Transmitter Control Code (TCC) specific to the Business Unit to distinguish the Business Unit’s information returns from those filed by OSC. Business Units may obtain a TCC by completing an application at http://www.irs.gov/pub/irs-pdf/f4419.pdf and filing the application accordingly. Business Units may not file paper information returns with the IRS when using the State’s EIN. Business Units that do not comply with IRS guidelines will be responsible for paying penalties assessed by the IRS. These penalties may be as much as $100 for each unfiled or incorrectly filed information return, up to a maximum penalty of $1.5 million.

Online Business Units

To facilitate complete and accurate federal reporting for online Business Units, each record in the Vendor File has a default value of “Yes” for withholding along with a standard “Withholding Class” for the vendor’s 1099 reporting. This default value makes all payments to the vendor reportable to the IRS and the vendor. Without a default value of “yes” for withholding, Business Units could not code any vouchers as 1099 reportable.

Despite this default value on all vendor records, Online Business Units must make a determination on each voucher as to whether the payment is subject to federal 1099-MISC reporting and, if so, whether the voucher reflects the correct withholding code. Online Business Units should reflect the determination it makes as follows:

• For vouchers processing payments that are subject to 1099-MISC reporting, save the voucher, go to the Invoice tab and click the “Withholding” link to view the default “Withholding Class.” Adjust the “Withholding Class” as necessary based on the information in the chart below.
• For vouchers processing payments that are not subject to 1099-MISC reporting, save the voucher, go to the Invoice tab, click the “Withholding” link, and then un-check the “Withholding Applicable” field.

Bulkload Business Units

Bulkload Business Units must make a determination on each voucher as to whether the payment is subject to federal 1099-MISC reporting and, if so, ensure the voucher has the proper “Withholding Class.” Bulkload Business Units should reflect the determination it makes regarding as follows:

• For transactions that are subject to 1099-MISC reporting, code the voucher with the appropriate “Withholding Class” from the chart below.
• For transactions that are not subject to 1099-MISC reporting, leave the “Withholding Class” field of the voucher blank.

Withholding Class Codes

Payments made for the following services are subject to federal reporting and must be processed using the withholding class noted.

Types of Payments	Withholding Class
Rent	01
Client Payroll/Work for Pay Jury Payment Loan Forgiveness Prizes and Awards Settlement Payments to Claimants	03
Hospital/Medical Payments	06
Non-Employee Services Life Insurance for Military	07
Settlements payments for attorneys	14

When processing interest payments, Business Units must use the account code outlined below in order for the BSE to produce a Form 1099-INT. Business Units should leave the withholding class blank for all interest payments.

SFS Account Code	Title	Description
58401	Prompt Payment Interest	Interest on late payments for unjustified delays in paying vendors, and providers of service pursuant to Article 11-A of the State Finance Law.
58402	Interest on Leases, Loans and Land Claims	Interest payments related to lease purchases including Certificates of Participation, UI interest assessment payments, and land claims (eminent domain).
58403	Prompt Contracting Interest	Interest payments to not-for-profit entities when contract payments are late due to untimely delays in contract processing and in which no advance or loan was provided.
60200	Settlement Interest	Interest paid for delays as declared in claims, awards, judgments and settlement agreements.
60311	Interest – Grants on Others	Interest on late payments for unjustified delays in paying vendors, and providers of service pursuant to Article 11-A of the State Finance Law.
60740	Interest on Late Payments	Interest on late payments for unjustified delays in paying vendors, construction contractors, and providers of service pursuant to Article 11-A of the State Finance Law.

Transactions with Incorrect Withholding Information

If a Business Unit paid a voucher with incorrect withholding information, please contact the Federal Reporting Unit at [email protected] to request a correction.

Please contact OSC’s Bureau of State Expenditures Federal Reporting unit at (518) 486-4602 if you have any questions.

Processing Federally Reportable Payments for Legal Settlements, Judgments, and Awards

Section Overview and Policies:

This section provides Business Units with information on how to process payments for legal settlements, judgments, and awards in order to ensure accurate reporting to the Internal Revenue Service (IRS).

Depending on the nature of the claim for which the payment is being made, and whether single or joint payments are being made to the claimant and/or an attorney or law firm (attorney), one or two Forms 1099-MISC may need to be filed with the IRS. In some cases, the SFS (Statewide Financial System) will capture and produce the Form 1099-MISC. However, in other cases, the Business Unit will need to provide information to the Office of State Comptroller’s (OSC) Bureau of State Expenditures (BSE) so that an additional Form 1099-MISC can be produced outside of SFS.

For information on determining whether payments to claimants are reportable on Form 1099, please see Section 5.K – Determining Federal Reportability of Payments of this Chapter.

Important Note: As outlined in the above section titled Determining Federal Reportability of Payments, depending on the nature of the settlement, judgment or award, some payments to the claimant are not reportable and, therefore, will not require a Form 1099-MISC or 1099-INT. However, anytime an attorney receives a payment as part of a settlement, judgment or award, a Form 1099-MISC is required to be issued to the attorney as described below.

IRS FILING REQUIREMENTS FOR REPORTABLE PAYMENTS

Certain settlement, judgment or award payments in an aggregate amount of $600 or more paid to a claimant during a calendar year must be reported to the IRS. To ensure proper reporting of such payments, Business Units should follow the rules specified in items 1 through 4 below. If there is any interest associated with the payments, Business Units must follow the rules specified in the item 5 below to ensure proper processing and accounting for the interest portion of the payment.

1. If a settlement, judgment or award calls for a reportable payment made payable to the claimant only, the Business Unit must:
   1. Process a regular voucher using the “Withholding Class” code 03.

      Example: A settlement agreement is reached with a claimant for a case alleging sexual harassment. The agreement requires a check to be payable to the claimant for $70,000 for emotional distress (not related to personal injury).

      Result: $70,000 is paid to the claimant using the “Withholding Class” code 03 on a regular voucher. The SFS will produce the Form 1099-MISC.

2. If a settlement, judgment or award calls for a payment to the claimant but the check is made payable to the attorney only, the Business Unit must:
   1. Process a regular voucher using the “Withholding Class” code 14 for the payment to the attorney.
   2. Provide the required information by filling out the table referenced in the section below entitled “Information Required for Proper Federal Reporting of Settlement, Judgment, and Award Payments” pertaining to the claimant since the amount is also reportable to the claimant.

      Example: A settlement agreement is reached for $50,000 with a claimant for a case alleging wrongful termination of employment. The agreement requires a check for $50,000 to be payable to the attorney. The amount is reportable to both the attorney and the claimant.

      Result: $50,000 is paid to the attorney using the “Withholding Class” code 14 on a regular voucher. Two Forms 1099-MISC must be filed for $50,000 to both the attorney and the claimant. The SFS will generate the IRS Form 1099-MISC to the attorney based on the “Withholding Class” code 14 on the voucher. However, OSC must produce the second Form 1099-MISC to the claimant. Accordingly, the Business Unit must provide the required information by filling out the table referenced in the section below “Information Required for Proper Federal Reporting of Settlement, Judgment, and Award Payments” pertaining to the claimant.

3. If a settlement, judgment or award calls for a single payment made payable jointly to both the claimant AND the attorney, the Business Unit must:
   1. Process a single payment voucher using the Vendor ID 0400000004 for the claimant AND the attorney as joint payees.
   2. Provide the required information by filling out the table referenced in the section below “Information Required for Proper Federal Reporting of Settlement, Judgment, and Award Payments” pertaining to both the claimant AND the attorney since federal reporting cannot be done from a single payment voucher.

      Example: A settlement agreement is reached for $100,000 with a claimant for emotional distress damages (e.g., a claim alleging race discrimination in employment). The agreement requires a check for $100,000 to be payable jointly to an attorney AND the claimant.

      Result: $100,000 is paid jointly to the claimant and the attorney using a single payment voucher. The SFS cannot generate the Form 1099-MISC from single payment vouchers, but two Forms 1099-MISC must be filed for the claimant and the attorney for $100,000 each. Accordingly, OSC will produce both Form 1099-MISC. Therefore, the Business Unit must provide the required information by filling out the table referenced in the section “Information Required for Proper Federal Reporting of Settlement, Judgment ,and Award Payments” pertaining to both the claimant and attorney.

4. If a settlement, judgment or award calls for two separate payments to be made: one payment to the claimant and the other payment to the attorney, the Business Unit must:
   1. Process a regular voucher using the “Withholding Class” code 14 for the attorney’s payment.
   2. Process a regular voucher using the “Withholding Class” code 03 for the claimant’s payment.
   3. Provide the required information by filling out the table referenced in the section below “Information Required for Proper Federal Reporting of Settlement, Judgment, and Award Payments” pertaining to both the claimant and attorney. The Business Unit should record the sum of the two payments in the “Reportable Payment Amount” in the claimant portion of the table.

      Example: A settlement agreement is reached for $300,000 in damages resulting from emotional distress. The agreement requires the settlement to be paid with two separate checks. One check for $100,000 is due the attorney as compensation for legal services rendered to the claimant. Another check for $200,000 is due the claimant.

      Result: $100,000 is paid to the attorney using the “Withholding Class” code 14 on a regular voucher. $200,000 is paid to the claimant using the “Withholding Class” code 03 on a regular voucher. However, $300,000 (sum of the two payments) must be reported to the claimant on Form 1099-MISC. For OSC to correct the claimant’s Form 1099-MISC, the Business Unit must provide the required information by filling out the table referenced in the section below “Information Required for Proper Federal Reporting of Settlement, Judgment and Award Payments” pertaining to both the claimant and attorney.

5. Any interest associated with a settlement, judgment or award is always reportable. Using the scenarios above, interest should be processed and accounted for as follows:
   1. Payment made payable to claimant only. Record the interest portion of the payment on the voucher’s distribution line using the Account Code 60200, and leave the “Withholding Class” code blank for the interest portion of the payment. This will ensure the interest is reported on Form 1099-INT.
   2. Payment made payable to the attorney only. Total the interest and principle amounts when recording the “withholding class” of code 14 on the regular voucher. Record the interest amount when filling in the claimant information in the table referenced below.
   3. Payment made jointly on a single payment voucher. Total the interest and principle amounts when filling in the attorney information in the table. Record the interest amount when filling in the claimant information in the table referenced below.
   4. Two separate payments to the claimant and attorney. Record the interest amount when filling the claimant information in the table referenced below.

Information Required for Federal Reporting of Payments for Legal Settlements, Judgments and Awards

When payments pursuant to legal settlements, judgments, and awards are reportable to both a claimant and an attorney, the Business Unit must collect and document the information required on the form entitled “Information Required For Proper Federal Reporting of Settlement, Judgment, and Award Payments.” The completed form must be emailed, along with the NYS Substitute Form W-9 for both claimant and attorney, to the BSE’s Federal Reporting Unit at [email protected] at the time vouchers are submitted to OSC. Please note, the requested information contains confidential data, and, therefore, should be encrypted before sending it to OSC. The Business Unit should send a separate email to the Federal Reporting Unit with the password to unencrypt the information.

Please note that BSE will not process any settlement payments until the Federal Reporting Unit receives all the required information.

For more information, please contact BSE’s Federal Reporting Unit at (518) 486-4602.

Guide to Financial Operations

REV. 09/14/2015