How do you know who needs a 1099 and who doesn’t? And how do you fill them out to be sure you’ve given the taxman everything required? Here’s a handy guide to everything you need to know about Form 1099-MISC.
If you’ve paid an independent contractor for goods or services during the year, you will most likely need to send them a 1099-MISC while also reporting their income to the IRS at the beginning of next year.
What is a 1099-MISC?
While there are a variety of 1099 forms, but the most common one is 1099-MISC. It’s used to report payments to contractors and service providers who are not employees at your company and do not have taxes withheld.
Because this form is provided to both the contractor and the IRS, it allows the government to track the amount of tax they should expect from non-employee contractors. This allows the IRS to determine whether the contractor, who is responsible for paying their own taxes, is paying the correct amount when their return is filed.
It’s important to remember that corporations, including S-Corporations and C-Corporations, generally do not receive a 1099-MISC for services they provide. But to confuse the situation, if you pay attorney’s fees, you will have to issue a 1099-MISC, even if the attorney is incorporated. Other exceptions include payments to for-profit medical providers.
Form 1099-MISC should only be issued to document payments for services rendered, but not for goods purchased. There is also a $600.00 threshold that needs to be surpassed, so you won’t have to issue a 1099-MISC to a contractor that has been paid less than that amount during the year.
When is a 1099-MISC required?
While there are exceptions to every rule, you will need to send a 1099-MISC if you’ve paid:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
- At least $600 for:
- Services performed by someone who is not an employee
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney
What date should a 1099-MISC be filed?
The deadline for recipients to receive their 1099-MISC for the prior tax year is January 31, if sent electronically, or postmarked by January 31 if mailed. The deadline for filing with the IRS is also January 31 annually.
Form 1099-MISC instructions
In order to complete a 1099-MISC accurately, you will need information usually found on their W-9. All contractors should provide you a W-9 when starting their work with your business. Here’s what you need:
- Downloadable PDF of Form 1099-MISC
- The legal name of the contractor.
- Their business name if it is different from the contractor’s name.
- The federal tax classification of the contractor, so you will know whether you need to issue a 1099-MISC.
- Current and accurate mailing addresses.
- Tax Identification Number (EIN) or Social Security number.
- The total amount of funds paid to the contractor for the calendar year
To begin preparing a 1099-MISC, you’ll need to enter all of the above information. Next, there are 17 boxes on Form 1099-MISC.
Here’s a rundown with instructions for each of the boxes on Form 1099.
Box 1 – Rents – This is used to report rent paid to a property owner. Rent paid to a real estate agent or property manager will not have to be reported. This box is also used for machine rentals or pasture land rental.
Box 2 – Royalties – This is used to report royalty payments of $10.00 or more for oil and gas royalties as well as royalties for intangible property such as patents, copyrights, and trademarks.
Box 3 – Other Income – Other income of more than $600.00 is reported in this box. This is for any income that is not reportable in any of the other boxes on Form 1099-MISC.
Box 4 – Federal Income Tax – If you are required to backup withholding on any nonemployees or contractors, you would enter the amount withheld in this box.
Box 5 – Fishing Boat Proceeds – Any proceeds from the sale of a catch on a fishing boat is entered in this box. Any additional cash payments made to fishing boat crews are entered in the box as well.
Box 6 – Medical and Health Care Payments – This includes payments made for various health care services such as injections or medications. Flexible spending accounts and employer-provided health care coverage are excluded. This mainly pertains to any payments made directly to a health care provider for services not covered by an insurance plan, but be sure to check with the IRS for specifics.
Box 7 – Payer Made Direct Sales of $5,000 or more – Enter an “X” in the checkbox for sales of $5,000 or more of consumer products by you to a person on a buy-sell, deposit–commission, or other commission basis for resale anywhere other than a retail establishment. No dollar figure should be entered in this box.
Box 8 – Substitute Payments in Lieu of Dividends or Interest – This is where you would enter aggregate payments of at least $10.00 of substitute payments received by a broker for a customer in lieu of dividends or tax-exempt interest as a result of a loan of a customer’s securities.
Box 9 – Crop Insurance Proceeds – This is used to report crop insurance proceeds paid to a farmer in the amount of at least $600.00.
Box 10 – Gross Proceeds Paid to an Attorney – Report proceeds more than $600.00 paid to an attorney in connection with legal services, such as a settlement.
Box 11 – Not used.
Box 12 – Box 12 is used to report Section 409A Deferrals. This box is not required. If you do complete this box, enter the total amount deferred during the year of at least $600.00 for the nonemployee under all nonqualified plans.
Box 13 – Excess Golden Parachute Payments – Report wages, bonuses, severance pay, fringe benefits, pension benefits, transfer of property, the accelerated vesting or granting of stock options, and other deferred compensation that result from termination of a key employee after change of ownership or control of a business.
Box 14 – Nonqualified Deferred Compensation – Enter all amounts deferred (including earnings on amounts deferred) that are includible in income under section 409A if the nonqualified deferred compensation (NQDC) plan fails to satisfy the requirements of section 409A.
Box 15-17 – These boxes are used to report required information for recipients living in states that use the Combined Federal/State Filing Program.
Form 1099-MISC can be one of the more confusing forms that you have to fill out, but luckily, if you keep your accounting records up to date, most of the work is done for you.
While small companies may process their 1099’s without the use of a payroll software provider, for those that pay a several contractors or have a specialty business such as music publishers, it pays to automate the process as much as you can.