Form 1099-Misc is a tax form that reports the year-end summary of all non-employee compensation. The 1099-Misc form covers rent, royalties, self-employment and independent contractor income, crop insurance proceeds and several other kinds of miscellaneous income.
A business or client who pays a vendor for his or her services, generally must issue form 1099-Misc to the payee by January 31st of the following year and file a copy of the form to the IRS by last day of January. Since the 1099-Misc is an information return, meaning it’s created for informational purposes only and not attached to income tax forms filed with the state and federal government, only one form should be issued to each contract worker. A client is required to only generate and issue the 1099-Misc if $600 or more was paid to a non-employee over the course of the year. Any amount paid less than $600 does not need to be reported to the IRS. However, a freelancer who earns, say $300, from ten different clients during the year must still report and pay taxes on the income even though s/he will not receive 1099-Misc forms from each of the ten clients.
In addition to using Form 1099-Misc to report payments made to a non-employee as earned income, a client should also use the form to report any payment of at least $10 in royalties and at least $600 for non-services such as rent, attorney fees, medical and health care, prizes and awards to non-employees, fish purchased from a fish vendor, etc.
Before a Form 1099-Misc can be prepared for a vendor, a W-9 form must be requested and gotten from each contractor. In summary, the W-9 form is a record that certifies the non-employee’s name, address, taxpayer identification number (such as a Social Security Number), Foreign Account Tax Compliance Act (FATCA) code, and US citizenship or residency.
Form 1099-Misc has 18 boxes which do not all have to filled, depending on the type of payment that was made to a vendor. The boxes are:
- Box 1 – Rental payments made to the individual contractor or freelancer
- Box 2 – Total of any royalties paid above $10
- Box 3 – Other income payments that do not fit in any other boxes on the form, such as prizes and awards to non-employees
- Box 4 – Any federal income tax withheld from the contractor’s payment
- Box 5 – Payments made to a fishing boat contractor
- Box 6 – Value of medical and healthcare benefits provided to an independent contractor
- Box 7 – Payments made to contract workers for services provided to the client
- Box 8 – Payment or reimbursement made to an investor whose shares were lent to a short-seller
- Box 9 – This box is to be checked only, if $5,000 or more worth of consumer products were sold to a person on a commission-basis for resale purposes
- Box 10 – An insurance company would fill out this box if it paid $600 or more to farmers
- Boxes 11 and 12 – Both boxes are blank on the sheet
- Box 13 – The amount in excess of any parachute payment over the base amount paid to an employee who has left the company
- Box 14 – $600 or more paid to an attorney for providing legal services
- Box 15a and 15b – Any contributions made to a section 409A retirement plan.
- Boxes 16 to 18 – These boxes are only provided for convenience to track state income information and do not need to be completed by the payer. Information for more than one state will need to be entered in another 1099-Misc form.
Following the box categories provided, an independent web designer who provided services to Company Z for $$6,500 over the course of the year will have this amount filled in Box 7 of the 1099-Misc form.
For each 1099-Misc form prepared for a contract worker, the client will have to include information about its business such as business name, address, and Federal Employer ID number. In addition to the payment or proceed amounts that will be entered in one or more of the boxes above, the client must have the payee’s taxpayer identification number (TIN) on the form.
File Form 1099-MISC, Miscellaneous Income, for each person in the course of your business to whom you have paid during the year:
- At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);
- At least $600 in:
- Rents (box 1);
- Services performed by someone who is not your employee (including parts and materials), box 7;
- Prizes and awards (see instructions for boxes 3 and 7);
- Other income payments (box 3);
- Medical and health care payments (box 6);
- Crop insurance proceeds (box 10);
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish (box 7);
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 3);
- Payments to an attorney. (See Payments to attorneys), later; or
- Any fishing boat proceeds (box 5).
In addition, use this form to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment. Forms 1099-Misc can be filed electronically no matter the number processed. If 250 or more are processed, then they are required to be filed electronically.
Payments made with Credit Cards
According to the IRS, payments made with credits cards do not have to be reported on the Form 1099-Misc. Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.
Payments to attorneys
Payments made to attorneys should be included on the Form 1099-Misc. Payments are reported in Box 7 or Box 14 depending on the type of payment. Box 7 would include professional services fees paid. Box 14 would include payments made in connection with a legal settlement.
Medical and Healthcare Payments
Box 6, Medical and Healthcare Payments should include payments of $600 or more made to physicians, hospitals or other vendors for medical healthcare services. This would include charges for physicals, drug testing etc. If you are only purchasing supplies and no service is provided, do not issue Form 1099- Misc. If supplies are provided as a part of a service (i.e. injection, drugs etc.) then include the total for supplies and services in Box 6. Payments to pharmacies for prescription drugs or insurance companies for premiums for insurance coverage does not have to be reported on the Form 1099-Misc.
Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported by you to the IRS on any form. See section 117(b)–(d) and Regulations section 1.6041-3(n) for more information.
Reportable payments to corporations
The following payments made to corporations generally must be reported on Form 1099-MISC.
- Medical and health care payments reported in box 6.
- Fish purchases for cash reported in box 7.
- Attorneys’ fees reported in box 7.
- Gross proceeds paid to an attorney reported in box 14.
- Substitute payments in lieu of dividends or tax-exempt interest reported in box 8.
- Payments by a federal executive agency for services (vendors) reported in box 7.