Know Your Branch's Tax Requirements

Know Your Branch’s Tax Requirements
By Jimmy Warden
NAPS Secretary/Treasurer

Over the past couple months, I have been attending many state conventions and training seminars. It’s always great seeing and speaking with members from around the country.

One topic that members asked about is the use and need for IRS Form 1099. A 1099 is used to report non-employment income to the IRS. Businesses, as well as nonprofit organizations, typically are required to issue a 1099 to a taxpayer other than a corporation who has received at least $600 or more in non-employment income during the specific tax year.

There are 11 types of 1099s. The one that pertains to NAPS and local branches is the 1099-NEC. Many members have received a 1099-NEC from NAPS Headquarters at the end of each January for sponsorship money they received for signing new members. Again, a 1099 is required when sponsorship money totals $600 or more in a year.

NAPS Executive Board members also receive a 1099-NEC when they have $600 or more in substitution pay. NAPS Headquarters is required to file 1099 forms with the IRS once the $600-or-more threshold is reached.

How does a 1099 affect a local or state NAPS branch? If a member receives branch funds as a form of compensation and the amount is $600 or more in a calendar year, the branch is required to give that member a 1099-NEC. The branch also must file the 1099-NEC with the IRS.

If the amount is less than $600 in a calendar year, a branch is not required to issue a member a 1099-NEC or report it to the IRS. However, that does not exclude a member from claiming this income on their taxes. NAPS recommends you check with a tax professional regarding your personal income-tax filing.

Please note that if a member receives branch funds for the reimbursement of official branch-related expenses, this money is not subject to a 1099-NEC. NAPS branches have great responsibility in disbursing funds:

• First and foremost, every branch should have nonprofit status and an employee identification number (EIN) from the IRS.
• Second, every branch should have an updated Constitution & Bylaws that specifically states who is entitled to attend conventions, Legislative Training Seminars, training seminars, etc. The branch Constitution & Bylaws should state exactly what expenses for which a member will be reimbursed after attending a NAPS event. Receipts for expenses should be submitted for reimbursement, too.
• Third, should a branch wish to send a member to an event whose position is not listed in the Constitution & Bylaws, a motion must be made at a membership meeting to send the member with specific expenses to be paid. The motion must have a second, then voted on as approved or disapproved.

The meeting minutes should include what motion was approved, who is to attend and what expenses will be reimbursed. If GSA per diem is granted, receipts for the per diem are not needed for reimbursement. But it should state per diem in the Constitution & Bylaws or in the meeting minutes.

If a situation falls under the two scenarios I just referenced, then a 1099-NEC is not needed. The expenses were approved by the membership and receipts justify payment.

Now, if the branch decides to send a member(s) to an event and reimburse their expenses (travel, hotel, per diem, etc.), but it was not stated in the branch Constitution & Bylaws, not voted on at a membership meeting, not included in the written meeting minutes and expenses are $600 or more, the branch must send the member a 1099-NEC and file a 1099-NEC with the IRS.

In this scenario, a 1099-NEC is required, even if receipts were submitted to document the expenses. By not properly documenting and approving a member to attend a NAPS event and thereby reimbursing them for expenses incurred, it can be construed as a free trip or vacation at the expense of NAPS. It should be declared as income to the member and a 1099-NEC issued.

Many branches state in their Constitution & Bylaws that branch officers are to receive a yearly stipend to cover branch expenses they incur. If the amount is $600 or greater, then receipts must be turned in to the branch.

Per a branch’s Constitution & Bylaws, if an officer receives branch funds on a continuing basis (monthly,quarterly) for branch-related expenses, an expense sheet with receipts must be submitted to the branch. If not, and more than $600 was given to the member in a year, a 1099-NEC must be given to the branch officer.

In instances where a branch officer is given a monthly or quarterly stipend and, at the same time, submitting receipts for reimbursement of branch expenses, the stipend should be reduced by the amount of the expenses. If not, the stipend then should be considered income (salary) to the member and a branch 1099-NEC should be issued.

Another question posed to me was what is the difference between a 1099-NEC and a W-2? The 1099-NEC reports income from self-employment, freelance work, investments or any other non-employee sources. A W-2 reports wages, salaries and has taxes withheld by employers.

I am aware of a local branch that has salaried employees who work in their NAPS office. These employees receive a W-2, which the branch also files with the IRS.

I understand it can be confusing; many may interpret the law differently. But the law is the law. I strongly recommend that if any branch has a concern about 1099 filings, they should contact a tax consultant to ensure they are in IRS compliance.

If the IRS audits a branch, the branch must present its Constitution & Bylaws and all corresponding minutes from the meetings, along with sign-in sheets. Failure to do so could result in the suspension of the branch’s nonprofit status. If a branch does not have nonprofit status, all income, including DCO funds received, can be taxed. The branch most likely would be held liable for tax penalties.

I want to wish everyone a very happy and healthy summer! Stay safe and always remember, increasing membership demonstrates leadership. Membership is on the rise—as of April, we were 29,155 strong!