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27Mar

Tax Reporting Obligations for Respondent Incentives

For the survey, opinion and marketing research profession, payment information return obligations under Section 6041(a) of the Internal Revenue Code and Section 1.6041-1(a) of the Income Tax Regulations, require that every person engaged in a trade or business must make an information return for each person to whom payment is made for services in the course of his or its trade or business of amounts which aggregate $600 or more during that year. Payments can consist of any fixed or determinable salaries, wages, commissions, fees or other forms of compensation. Relevant to marketing research, Section 1.6041-1(d)(3) of the Regulations state that the amount paid as prizes and awards must be included in the recipient’s gross income. Code Section 74 or Section 117 (relating to qualified scholarships), gross income includes all amounts received as prizes and awards. If the prize or award is not made in money but is in the form of goods and services, the fair market value of the goods or services is the amount to be included in income.

Amounts paid by a research company’s client to fund the payments made to survey respondents constitute an expense pass-through. So long as they are separately identified as such they should not be classified as being part of the fee that is paid to the research company.

Responsible Party with Reporting Obligations

The responsible party with the tax reporting obligations is specifically discussed in the “middleman” regulations located at Regs. § 1.6041-1[e]. Generally speaking, a person who as an agent makes a payment on behalf of a principal is not deemed to be the payor for information return reporting purposes. However, under Regulation Section 1.6041-1(e)(1), a person that makes a payment in the course of its trade or business on behalf of another person is the payor that must file the information return with respect to that payment, if under all of the facts and circumstances, that person performs management or oversight functions in connection with the payment, or if the person has a significant economic interest in the payment (such as a property interest  that would be affected by a mechanic’s lien or loss of collateral.)  Conversely, a person who performs mere administrative or ministerial functions, such as check-writing, at the other person’s direction does not have oversight or management functions.

The determination of whether a person performs management or oversight functions with respect to payment made on behalf of another, or has a significant economic interest in connection with such payment, is a factual one. Whether an agent has a reporting obligation under these standards must be determined in each instance based on the particular facts and circumstances. The “middleman” regulations contain several examples, none of which are particularly applicable to survey research situations. However, if the payment in question is being made to a participant in a consumer research survey that has been designed and is being administered by the marketing research company, that company would seem to possess sufficient management or oversight functions to qualify as a reporting payor.

Situations Involving Multiple Reporting Obligations

In situations where the client service-recipient might be obligated to report the payment made on its behalf and the market research company may also report it, Regulations Section 1.6041-1(e)(2) sets forth the rule that the party closest in the chain to the payee must report the payment. Unless the parties agree in writing that one of the other parties meeting the test for reporting will report the payment.

Regulation Section 1.6041-1(d)(3) specifically provides that amounts paid as prizes and awards that are required to be included in the recipient’s gross income are required to be reported in the information returns filed by the payor when paid in the course of the payor’s trade or business. That being the case, it does not appear probable that the Service would condone an exception based upon the absence of employee or independent contractor status.

In situations where the market research sponsor has employed multiple survey firms to perform studies during a calendar year, where the result would produce participants in multiple surveys who received more than $600 payments, the “middleman” regulations would also deal with this matter. So long as the research firm which is actually performing the survey also makes the payments to survey participants, that research firm will be the most proximate payor in the chain and possess the reporting requirements. If it reports as to the payments it has made, the research firm has fulfilled its obligations and, derivatively, the obligations of the study sponsor.

If the research company is not furnished with social security numbers for recipients of amounts that equal or exceed the $600 annual threshold, the research company does not have to become involved in disputes over privacy rights. Instead, as specified in Technical  Advice Memorandum 892 7002, its obligation is simply to withhold and pay over to the IRS the backup withholding amount, which is the sum that equals 20 percent of the amounts otherwise payable to the survey participant in question.

Obtaining a TIN

The source of this is found in Section 3406(a)(1)(A) of the Internal Revenue Code which provides in relevant part, that in the case of any reportable payment, if the payee fails to furnish his Tax Identification Numbers (TIN) to the payor in a manner required, then the payor must deduct and withhold from such payment a tax equal to 20 percent of such payment. Code Section 3406(b) defines the term “reportable payment” to mean (1) any reportable interest or dividend payment, and (2) any other reportable payment. Code Section 3406(b)(3) provides, in part, that the term “other reportable payment” means any payment of a kind, and to payee, required to be shown on a return required under Section 6041 (relating to information at source) or Section 6041A(a) (relating to payments of remuneration for services).

Code Section 3406(b)(6) states that any payment of a kind required to be shown on a return required under Section 6041(a) or 6041A(a) which is made during a calendar year will be treated as a reportable payment only if the aggregate amount of such payment and all previous payments described in such sections by the payor to the payee during that calendar year equals or exceeds the $600 threshold. This backup withholding requirement applies regardless of whether the payee was asked for the TIN prior to or at the time the payment was made (TAM 8927002).

If Forms 1096 or 1099 are not filed as required (whether because of a failure to obtain a TIN or otherwise), then there must be a 20 percent backup withholding. If the payor does not withhold this amount out of the payments made to the participant, then it must itself pay the taxes that should have been withheld to the IRS.

The information provided in this document is not intended and should not be construed as or substituted for legal advice. It is provided for informational purposes only. It is advisable to consult with private counsel on the precise scope and interpretation of any given laws/legislation and their impact on your particular business.

Information developed based on the advice and guidance of counsel provided by Theodore England of Ferguson, Case, Orr, Paterson, LLP in a memorandum dated January 11, 2008 and memorandum dated January 16, 2008.

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