IRS 6042(c): Who Is Exempt From 1099-DIV Reporting?

Businesses that pay dividends to shareholders or other individuals are generally subject to tax information reporting requirements. This system ensures that the Internal Revenue Service (IRS) receives information about these payments. While broad, the Internal Revenue Code provides specific exceptions to these rules. Understanding these exceptions can reduce administrative tasks for payers.

The General Dividend Reporting Requirement

When a business or financial institution pays dividends, it must report these payments to the IRS. This is accomplished using Form 1099-DIV, Dividends and Distributions. The general rule, found in Internal Revenue Code Section 6042, mandates that a payer must issue this form to any person to whom they have paid dividends and other distributions valued at $10 or more during a calendar year. This threshold applies to the aggregate amount of payments made to that person over the course of the year.

For reporting purposes, a “dividend” includes not just ordinary dividends but also capital gain dividends and exempt-interest dividends. The form details the total amount of the distributions, the name and address of the recipient, and their taxpayer identification number (TIN).

The requirement also extends beyond the $10 threshold in specific situations. A Form 1099-DIV must be filed regardless of the amount if any federal income tax was withheld under backup withholding rules. If any foreign tax was paid on dividends or the payment of $600 or more was part of a corporate liquidation, reporting is also required.

Exempt Recipients Under Section 6042(c)

Internal Revenue Code Section 6042(c) provides an exception to the general reporting rule by identifying certain payees as “exempt recipients.” When a payment is made to one of these entities, the payer is not required to file a Form 1099-DIV. This relieves the payer of the reporting burden for a large class of payees that are not subject to the same tax reporting needs as individuals.

The list of exempt recipients is specific and includes:

• Corporations, which encompasses both C corporations and S corporations
• Tax-exempt organizations, such as charities and foundations recognized under Section 501(a)
• Individual retirement arrangements (IRAs), Archer MSAs, and health savings accounts (HSAs)
• Governmental bodies, such as the United States, its agencies, states, and their political subdivisions
• Registered securities or commodities dealers

Using Form W-9 to Document Exempt Status

A payer cannot simply assume a payee qualifies as an exempt recipient; they must have a basis for this determination. The primary tool for this documentation is Form W-9, Request for Taxpayer Identification Number and Certification. This form is used by the payer to collect the payee’s name, address, and TIN, but it also serves as a certification of their tax status. The payer must obtain a properly completed Form W-9 from the payee.

The form contains a specific section for the payee to claim their exemption from information reporting. On the Form W-9, there is a box labeled “Exempt payee code (if any).” A payee that qualifies as an exempt recipient should enter the appropriate code in this box. The instructions for Form W-9 provide a list of codes that correspond to the different types of exempt recipients.

When a payer receives a Form W-9, they must review it to ensure it is properly completed. This includes verifying that the name and TIN match and that an appropriate exempt payee code has been entered if an exemption is claimed. By retaining this certified document, the payer establishes a reasonable basis for not filing a Form 1099-DIV for that payee, protecting them from potential penalties should the payee’s status be questioned later.

Backup Withholding and Penalties

Failing to correctly identify a payee’s status carries direct consequences. If a payer does not file a required Form 1099-DIV, they can face penalties for failure to file a correct information return. The risk is highest when a payer fails to obtain a Form W-9 and incorrectly treats a non-exempt payee as exempt.

A more immediate consequence is the requirement for backup withholding. If a payee fails to furnish a correct TIN on Form W-9, the payer is required to begin backup withholding from any reportable payments. The current backup withholding rate is 24%. This means the payer must deduct this amount from the dividend payment and remit it to the IRS.

Even if a payee is truly exempt, if they fail to provide a certified Form W-9 with a valid TIN, the payer must still initiate backup withholding. The payer must then report the amount withheld on a Form 1099-DIV, even for a payment that would have otherwise been exempt from reporting.