1099 Configuration in SAP for US Implementations

 1099 and 1042 Business Process and Reporting is only applicable to US implementations.

1099 withholding taxes: Reporting of 1099 taxes involves miscellaneous income paid to non-incorporated vendors or non-employees. Income is classified into one of eleven categories. With the majority of companies use category “07, Non-employee Compensation.” The majority of companies do not actually withhold income taxes from payments to 1099 vendors; rather, these companies report the amount of payments made to “1099” vendors to the IRS. In the rare circumstance when a company does deduct income taxes from a 1099 vendor (usually occurs when a vendor does not provide a tax number), the company deducts 31% of the amount due to the vendor and later pays this amount directly to the IRS.

Any adjustments between actual taxes due and the amount withheld are handled directly between the 1099 vendor and the IRS.

The reporting of 1099 taxes is done once per year (January) and is presented to the IRS in one of two methods: 1) printed form; 2) a data file. The income amounts reported to the IRS are only amounts paid to the 1099 vendor between January 1 and December 31 of the reporting year.

To be able to configure the 1099 vendor master, the account group to which the vendor is assigned must allow data entry into the tax code fields.

You should also ensure that the tax code number fields have the required field length. Tax code 1 should be of length 11 and tax code 2 should have a length of 10.These parameters are set in the Global Settings section of the IMG.

For the withholding tax code fields to be available in the FI document, the Field Status Group of the GL Reconciliation Account to which the vendor is assigned must allow data entry into the tax code fields (see graphic above). Similarly, if your company controls postings to fields via posting keys then the fields for the two tax code fields must be set for possible data entry (i.e., “optional”). This setting is necessary for all posting keys, that affect vendor processing (e.g., 21, 25, 31…). You must also have the Document Entry Screen Variant set to “2” in the company code global parameters in configuration.

There are three separate programs in the R/3 System involving 1099 vendor reporting. All programs allow for flexible selections of vendors and company codes. Each report is programmed to search first for withholding tax codes 01-11, FO-F9 in the vendor master record. Note: Company (payer) TIN (tax id number), name and address information for form and tape are derived from program parameters and NOT company code master records.

Configuring 1042 Taxes

Reporting of 1042 taxes involves income paid to foreign vendors of foreign non-employees. Income is classified into 1 of approximately 20 categories (please see IRS 1042 publication). Companies are usually required to withhold/deduct income taxes from payments to 1042 vendors. Companies usually (see current IRS publication for rates) deduct 31 % of the payment made to this type of vendor. This withheld portion is later paid to the IRS directly by the company and any adjustments between the actual taxes due and the amount withheld are handled directly between the 1042 vendor and the IRS. Reporting of 1042 taxes is done once a year (February) and is presented to the IRS in two methods: 1) printed forms and, 2) a data file. The income amounts reported to the IRS are only the amounts paid to the 1042 vendor between January 1 and December 31 of the reporting year.

To configure the 1042 vendor master, the account group to which the vendor is assigned must allow data entry into the tax code fields. Note: You should also ensure that the tax code number fields have the required Field length. Tax code 1 should be of length 11 and tax code 2 should have a length of 10. These parameters are set in the Global Settings section of the IMG.

For the withholding tax code fields to be available on the Fl document, the Field Status Group of the GL Reconciliation Account to which the vendor is assigned must allow data entry into the tax code fields (see graphic above). Similarly, if your company controls postings to fields via posting keys, then the fields for the two tax code fields must be set for possible data entry (i.e., “optional”). This setting is necessary for all posting keys that affect vendor processing (e.g., 21, 25, 31…).

A withholding tax country is the country of the foreign vendor’s legal residence. You enter the reporting country (US) in the left-hand column and the withholding tax country in the middle column. Withholding tax country identifiers do not always correspond to ISO 9000 standards; the IRS defines these country identifiers. Please see IRS publication 1042 for a complete list of countries and their correct IDs.

The withholding tax indicator from the 1099 vendor master defaults into the line item during invoicing. This indicator can be overwritten at this time if desired. The withholding tax base and the withholding tax exempt fields serve separate purposes. The withholding tax base field is the income amount of the line item to be reported to the IRS. If this field is left blank during invoice posting, the invoice amount of the line item defaults. The withholding tax exempt field is the amount of the line item that you do NOT wish to be reported to the IRS (e.g., reimbursement of expenses).

There are three separate programs in the R/3 System involving 1099 vendor reporting. All programs allow for flexible selections of vendors and company codes. Each report is programmed to search first for withholding tax codes 01 – 11, and FO-F9 in the vendor master record. Company (payer) name, address and TIN information (per each vendor paid record) for form and tape are derived from company code master records. The header record for tapes is derived from the program parameters. Only alternative payer name and TIN (tax ID number) are derived from program parameters.

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