When you are self-employed as an independent contractor or you have your own business, you have to file certain information returns for tax purposes when you make payments for rent, royalties, and services rendered to your business by persons who are not your employees. These returns serve to inform the recipients of the income they must report on the U.S. federal income tax returns. Copies of these information returns are sent to the Internal Revenue Service (IRS) so they can compare the amounts reported on the information returns filed by the payer with the income reported by the recipients on their tax returns. And, these information returns serve as support for you to be able to claim these payments as deductible business expenses on your own tax return.
What Is Form 1099-MISC?
Form 1099-MISC is one of the IRS tax information returns. It is used to report payments made during the year for different purposes as defined by the tax law. Forms 1099-MISC are sent to the recipients of the payments, so that they have the information they need to include these payments on their income tax returns, and are also sent to the IRS, for purposes of proving that all payments are actually reported by the recipients as income, and to corroborate the deductions that payers take for these expenses.
Form 1099-MISC is one of the 1099 series forms and is used to report payments not taken into consideration in one of the other form 1099, which are for specific purposes.
When Do I Have to Issue the Form 1099-MISC?
When you have made certain payments during the year that constitute income to the persons who received those payments, and those persons are not your employees, you have to issue a Form 1099-MISC. The payments that have to be reported are those made in the course of your occupation or business. Non-profit organizations are also subject to the requirements for issuing this form. But you do not have to report payments you make for personal expenses.
Certain payments, even when they may be taxable to the recipient, do not have to be reported on a Form 1099-MISC. These payments include: payments for merchandise, communication services such as telephone, freight, storage, and similar items; rent payments made to real estate brokers; salaries paid to employees (reported on W-2 forms); allowance paid to employees for travel expenses (included on W-2 forms); payments for life insurance coverage (included on W-2 or Form 1099-R); payments to a tax-exempt organization or to a government; certain transactions with payment cards if a payment card organization has assigned the merchant or recipient of the payment a Merchant Category Code.
Generally, you do not have to report payments to corporations on Form 1099-MISC, but there are some exceptions, including: payments for medical or health care services, cash purchases of fish, attorneys’ fees, gross proceeds paid to attorneys, substitute payments in lieu of dividends or tax-exempt interest, and payments made by a federal executive agency for services.
How To Prepare Form 1099-MISC
Blank Forms 1099-MISC can be obtained at IRS offices and may be available in certain public libraries. Since the printed forms are scanned during processing, Forms 1096, 1098, 1099 and 5498 cannot be downloaded and printed from the IRS website. The official printed forms can be requested by calling 1-800-TAX-FORM (1-800-829-3676), or can be ordered online at http://www.irs.gov/businesses/page/0,,id=23108,00.html.
In order to complete Form 1099-MISC, you will need the name, address, and taxpayer identification number of the recipient of the payments. If you do not have this information, you can request it by sending a Form W-9, “Request for Taxpayer Identification Number and Certification”, to the beneficiary of the payment.
Form 1099-MISC has a field for an account number. This account number is required when you have multiple accounts for a recipient for whom you have to issue more than one Form 1099-MISC. The IRS encourages the inclusion of an account number on all the Forms 1099-MISC that are issued.
The total amounts paid are included in the corresponding box. The following is a brief description of some of them:
Rents
This category includes all types of rents, such as rents of real property like office, workshop, or warehouse space; rents of machinery and equipment; and rents of pasturing land for cattle. When you rent equipment that comes with an operator, you need to separate the payment between the portion corresponding to the rental (which is reported in box 1) and the portion that corresponds to the operator’s remuneration as a non-employee (reported in box 7). Rental payments made to real estate agents are not included among these requirements.
Royalties
The gross amount of royalties must be reported, before any tax withholding that might have been made. This category includes royalties paid to an author or literary agent. Payments for the right to use the surface of the earth are reported as rent in box 1. Payments for the expenses of operating an oil or gas well are reported as nonemployee compensation in box 7. And, timber royalties, under a pay-as-cut contract, are reported on another form, the 1099-S.
Box 4 is used to report any additional income tax withheld, such as the 28% tax that must be withheld when you do not have the correct taxpayer identification number for the recipient of the payment.
Box 5 is for reporting the portion of the proceeds from the sale of fish that corresponds to each crew member when the boat normally has less than 10 crew members. If the fish is distributed in kind among the crew members, the fair market value of the portion corresponding to each crew member is reported in box 5. Also included in this box are cash payments of up to $100 per trip that are contingent on a minimum catch and that are paid only for performing additional duties.
Medical and health care payments
These are payments for a total of $600 or more that are made in the course of your occupation or business to each physician or medical or health care provider. The exemption from the requirement of issuing a Form 1099-MISC when the payment is to a corporation does not apply in the case of these types of payments, including payments to a professional corporation. However, you do not have to report payments to a tax-exempt hospital or to one that is owned by a government or any of its agencies.
When the payment for medical or health care includes charges for injections, medications, or other similar items, the entire payment is subject to the reporting requirement. However, you do not have to report payments to pharmacies for medications under prescription
Nonemployee compensation
This category includes payments to individuals who are not employees, partnerships, estates, and sometimes corporations, when payments are made in the course of your occupation or business and the total payments during the year were at least $600.
Some examples of the payments that would be included in this box 7 are: fees paid for professional services, such as attorneys (including corporations), accountants, engineers, architects, and contractors; fees paid from one professional to another, such as when they share a fee or are paid for referring a client; payments for services, including parts and materials when they form an integral part of the service; commissions paid to outside salespersons; fees paid to independent contractors, including reimbursements for travel expenses when an expense report is not required; bartering of services between persons in the course of their occupations or businesses; taxable fringe benefits provided to nonemployees; payments for a working interest in oil or gas; payments to an insurance salesperson who is not an employee according to common law or a statutory employee; remuneration paid to directors; and cash payments to purchase fish.
Substitute payments in lieu of dividends or interest
Box 8 is used to report payments for a total of at least $10 received by a broker on behalf of a client, in lieu of dividends or exempt interest, as a result of a loan of the client’s securities.
Payer made direct sales of $5,000 or more in consumer goods to a buyer for resale
You would mark the box in item 9 if you have made sales of $5,000 or more in consumer goods under a buy-sell, deposit and commission, or other commission-basis agreement for resale of the products anywhere other than in a permanent retail establishment. No amount is reported in this box. Instead, you should use another unofficial form, such as a letter, to inform the purchaser of these direct sales.
Box 10 would normally be used by insurance companies that make payments of $600 or more to farmers for insurance.
Excess golden parachute payments
A parachute payment is remuneration paid to a shareholder, executive, or highly-compensated employee when there is a change of ownership of a corporation, a change in the effective control of a corporation, or a change in ownership of a significant portion of a corporation’s assets. The amount to be reported in this box is the excess of the payment over the base amount, which is the annual average remuneration for services that was included in the person’s taxable income during the past five tax years.
Gross proceeds paid to an attorney
Box 14 includes payments to attorneys (including corporations) that are not reported in box 7 as fees. This could include, for example, payments made based on an agreement to settle a lawsuit or claim.
Section 409A Deferrals
If your business has a retirement plan to which nonemployees can defer part of their compensation to contribute to the plan, but the plan is considered to be a non-qualified deferred compensation plan because it does not meet the requirements of Section 409A of the tax code, the amount of these deferrals that total $600 or more during the year is reported in this box 15a.
Section 409A income
In box 15b you would report the deferred amounts from box 15a that are includible in income because the plan does not qualify under Section 409A. The amount reported in this box 15b is also includible in box 7, Nonemployee Compensation, and the recipient is generally subject to self-employment tax on this income.
Other income
All payments that do not correspond to another box are included in box 3 of Form 1099-MISC. These payments include: prizes that are not for services, such as contests; punitive damages; salaries paid for deceased employees the year after their death, in which case no social security or Medicare taxes are withheld; payments to members of Indian tribes that are made from the net revenues of gaming activities conducted or licensed by the tribes; and termination payments to former self-employed insurance salespeople.
What’s the Deadline for Filing Form 1099-MISC?
Copy B of Form 1099-MISC must be sent to the recipient by January 31 at the latest. Copy A must be sent to the IRS by February 28th. When you send Forms 1099-MISC to the IRS, you have to attach them to Form 1096, which is a separate form that summarizes the information returns you are sending.
When you send your information to the IRS electronically, the deadline is April 2nd. You need to have the necessary software. You can see the specifications in IRS Publication 1220, “Specifications for Filing Forms 1098, 1099, 5498 and W-2G Electronically or Magnetically.
