Understanding Tax Form 1099-Misc

As you are entering a new year, you are most likely reminded by your bookkeeper, accountant or CPA to distribute IRS form 1099-MISC to your vendors or independent contractor as well as file the form to the IRS.

In a nutshell, form 1099-MISC is issued by your business to a subcontractor or anyone who provides services to you for $600 or more during a calendar year. You will skip the 1099 if the provider of services is a corporation.

Report on Form 1099-MISC only when payments are made in the course of your trade or business. You are engaged in a trade or business if you operate for gain or profit. However, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements. Other organizations subject to these reporting requirements include trusts of qualified pension or profit-sharing plans of employers, certain organizations exempt from tax under section 501(c) or (d), farmers' cooperatives that are exempt from tax under section 521, and widely held fixed investment trusts.

By the end of January, you need to print and send a 1099-MISC form to each 1099 vendor that meets the threshold for at least one box on the form 1099. By the end of February, you need to send 1099-MISC forms and a 1096 form to the IRS.

What is 1099-MISC?

The IRS requires you to file a 1099-MISC form for each vendor or independent contractor to whom you make certain types of payments. The form is called 1099 Miscellaneous Income because your vendor will need to claim these payments as income.

You must mail Copy B of the 1099-MISC form to the recipient by January 31 for payments made in the previous tax year. You must also mail these forms to the IRS by February 28 along with a Form 1096.

What is a 1096?

Form 1096 summarizes the information from the 1099 forms you are sending for the tax year. It is a form that you send only to the IRS by February 28. It must accompany Copy A of the 1099-MISC forms that you submit to the IRS.

What are thresholds?

The threshold numbers are significant. If payments to a vendor don't meet the threshold, the payment amount is not included on a 1099. Only vendors who meet the threshold for at least one box receive a 1099-MISC.

Payments Subject to 1099

You are required to file Form 1099-MISC each calendar year, for the following payments that are most likely you did. For other types of payment, please read IRS Instruction for Form 1099-MISC.

Rents: $ 600 or more (Box 1)
Royalties: $10 or more (Box 2)
Prizes or Awards: $600 or more (Box 3)
Non-Employee Compensation: $600 or more (Box 7)
Medical or Health Care Payments: $600 or more (Box 6)
Attorneys (professional services: $600 or more (Box 7)
Attorneys (proceeds/damages): $600 or more (Box 14)
Any individual or entity in which federal/state tax was withheld under backup withholding rules (Box 4)

Be sure to report each payment in the proper box because the IRS uses this information to determine whether the recipient has properly reported the payment on her tax return.

1099 Vendors

Payment to the following non-corporation entities requires issuing Form 1099-MISC

Individuals (as independent contractor or a self-employed person)
Sole proprietors
Partnerships (including LLC, LLP)
d/b/a businesses

1099-Misc & W-2 From the Same Employer

Many time your employer will issue you a form W-2 (Wage and Tax Statement) for the wages or salaries paid in the year and 1099-Misc for other payments. If an employer makes extra payments (like bonus, car mileage expenses or per Diem expenses) to an employee other than the salaries/wages, and the employer does not ask the employee to account for the expenses (the unaccountable plan), then it issues 1099-Misc. Normally on the 1099-misc payments, the employer/company will not withhold any taxes from the payments.

Exceptions

Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which a Form 1099-MISC is not required include:

Payments to a corporation, which includes “Corp”, “Inc.”, “Corporation”, “Incorporated” and “P.C” (Professional Corporation). This exception is not apply to payments for legal service and medical or health care services.
Payments for merchandise, telegrams, telephone, freight, storage, and similar items;
Payments of rent to real estate agents
Wages and/or awards paid to employees (should be reported on Form W-2, Wage and Tax Statement)
Business travel allowances or reimbursements
Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs)
Payments the United States, a state, the District of Columbia, a U.S. possession, or a foreign government

The exemption from issuing Form 1099-MISC to a corporation does NOT apply to payments for:

Legal services provided by corporation. You must report attorneys' fees (in box 7) or gross proceeds (in box 14) to “corporations” that provide legal services.
Medical or health care services provided by corporations. However, you are not required to report payments made to a tax-exempt hospital or extended care facility or to a hospital or extended care facility owned and operated by the United States (or its possessions), a state, the District of Columbia, or any of their political subdivisions, agencies, or instrumentalities.