What is 1099 MISC.?
Form 1099-MISC is a variation of Form 1099 used in the United States to report miscellaneous income. Miscellaneous Income is a form used by the Internal Revenue Service (IRS) to report non-employee payments. Generally, this is a business payment, not a personal payment.
Who needs to file Form 1099-MISC (Miscellaneous Income)?
Every business organization or owner of a business is obliged to file Form 1099-MISC if they paid any of the following throughout the year:
- At least $10 in royalties (see At least $10 in royalties (see the instructions for box 2) or broker commissions in lieu of dividends or tax-exempt interest (see the instructions for box 8).
- Dividends in lieu of dividends or tax-free interest (see the instructions for box 8).
- At least $600 in :
- Rent (box 1);
- prizes and awards (box 3);
- other income payments (box 3);
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 3);
- Every time a fishing boat proceeds (box 5);
- medical and health care payments (box 6);
- crop insurance proceeds (box 9);
- payments to an attorney (box 10) (see Payments to attorneys, later);
- Section 409A deferrals (box 12);
- or nonqualified Deferred compensation (box 14).
Additionally, regardless of the amount of the payment, they must file Form 1099-MISC for each person from whom they withheld any federal income tax (report in box 4) under the backup withholding regulations.
Payments should be reported only when they are related to trade or business
Report on Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable. If you operate for gain or profit, you are engaged in a trade or business. Nonprofit organizations, on the other hand, are regarded as conducting a trade or business and are therefore subject to these reporting obligations. Additionally, trusts of qualifying pension or profit-sharing plans of employers, certain organizations exempt from tax under section 501(c) or (d), farmers’ cooperatives exempt from tax under section 521, and widely held fixed investment trusts are subject to similar reporting requirements. Payments made by federal, state, or municipal governments must also be reported.
Exceptions
Certain payments are exempt from reporting on Form 1099-MISC, even if they are taxable to the recipient. Payments that do not require a Form 1099-MISC include the following:
- Payments to a corporation are generally taxable, including payments to a limited liability company (LLC) that is treated as a C or S corporation. However, read the section below on “Reportable payments to corporations.”
- Payments for goods, telegrams, telephones, freight, and storage, among other things.
- Employee payments of wages, military differential while on active duty, and business travel allowances (reported on Form W-2).
- The cost of current life insurance protection
- Payments to certain tax-exempt organizations and governments.
- Certain state programs make payments to or for homeowners.
- Certain forms of compensation by the Department of Justice or state programs
- See full IRS instructions for other exceptions for payments such as criminal informants, scholarships, foster care, and canceled debts.
Reportable payments to corporations
Payments to corporations must normally be recorded on Form 1099-MISC.
- Box 6 is used to report medical and health care expenses.
- The gross amount paid to an attorney is indicated in box 10.
- In lieu of dividends or tax-exempt interest stated in box 8, substitute payments.
What is NEC (Nonemployee Compensation)?
You must normally disclose payment in 1099-NEC if the following four requirements are met
- You made the payment to an individual who is not an employee of yours.
- You paid for services rendered in the course of your trade or business (including government agencies and nonprofit organizations).
- You paid an individual, a partnership, an estate, or, in some instances, a corporation.
- You made at least $600 in payments to the payee during the year.
Additionally, firms must file Form 1099-NEC if they withheld any federal income tax from nonemployees under the backup withholding regulations, regardless of the amount given to the nonemployee for the year.
Nonemployee compensation can include:
- Fees
- Benefits
- Commissions
- Prizes and awards for services performed by a nonemployee
- Other kinds of compensation for services rendered by an individual who is not an employee of yours in connection with your trade or company
What is 1099 NEC?
Form 1099-NEC is the Internal Revenue Service (IRS) form that businesses will use beginning with the 2020 tax year to report payments made to independent contractors, freelancers, sole proprietors, and self-employed individuals.
Who needs to file Form 1099-NEC?
Any business owners that makes nonemployee compensation payments totaling $600 or more to at least one payee or withholds federal income tax from a nonemployee’s payment, will now use this revamped form to report those payments and withholding
What details do we need to know about the 1099-NEC form update?
- The non-employee compensation reported in Box 1 of Form 1099-NEC is generally reported as self-employment income and likely subject to self-employment tax.
- Payments to individuals that are not reportable on the 1099-NEC form, would usually be reported on Form 1099-MISC.
Some Important Aspects of 1099-MISC and 1099-NEC
- Payments to Corporations
- Payments to real estate agents or property management manager
If you rent space and pay your rent to a real estate agent or property manager rather than directly to the landlord, the real estate agency or property manager is obligated to deliver Form 1099-MISC to the property owner. You may question as to whether they are doing so and establish the circumstance under which an exception applies in your situation.
- Payments made via credit and debit card merchants
If you make your payment using a credit card, debit card, or other credit cards processing mechanism such as your bank card, PayPal, Square, and Stripe, the payment comes under Form 1099-K guidelines instead. You do not need to issue the 1099-MISC. The credit card processor will issue a 1099-K if those criteria apply.
Note: Cash transfers via providers such as Zelle, Venmo, CashApp, or cheques issued via electronic banking, do not qualify for this exception and still need you to send a 1099-MISC. Venmo rules of service prevent using it for business without permission
- Employee business expense reimbursements
Do not utilize Form 1099-MISC to report reimbursements for employee business expenses. On Form W-2, include payments given to employees under a non-accountable plan as wages. Payments made to employees under an accountable plan are generally not reportable on Form W-2, except in specific circumstances where a per diem or mileage allowance is paid. Additional information is available in the Instructions for Forms W-2 and W-3, as well as in Pub. 463. The Instructions for Forms W-2 and W-3 contain information on how to record employee relocating expense reimbursements on Form W-2.
- State or local sales taxes.
If the service provider is subject to state or local sales taxes and you (as the buyer) pay them to the service provider, include them in the reportable payment on Form 1099-MISC. However, if the service provider imposes sales taxes on you (as the customer) and collects them from you, do not report the sales taxes on Form 1099-MISC.
Year-End 1099s Filing Checklist:
The process of filing 1099 can’t be accomplished in just one step. There are several things you need to do. Here is a checklist:
- Review Vendor List and Eliminate Duplicate Vendor Names
- Review W-9 Forms and Determine which vendors should receive 1099 Forms
- Sign up for the 1099 Electronic Filing App
- Prepare 1099 Forms
- E-File 1099 Forms by the deadline
Timelines of Filing 1099s:
| IRS Form | 1099 Due date to Recipients | Filing to IRS by Mail | E-filing to IRS |
|---|---|---|---|
| 1099-NEC | January 31, 2022 | February 1, 2022 | January 31, 2022 |
| 1099-MISC | January 31, 2022 | March 1, 2022 | March 31, 2022 |
Know the Different Copies of a 1099s Form
Copy A—Goes to the IRS.
Copy 1—Goes to the state tax authorities.
Copy 2—Goes to the recipient.
Copy B—Goes to the recipient.
Copy C—Stays with the employer for record-keeping
Copy A is often transmitted electronically to the IRS, so employers rarely have to print this one.
Explaining the differences between Copy B and Copy 2, the former is specifically for the recipient’s records. This is how they know how much you are reporting to the IRS. Copy 2 goes to the state income tax return.
Penalties on Failure to File 1099s
If a business fails to file a 1099-NEC or 1099-MISC before the deadline, the penalty ranges from $50 to $270 per form, depending on how late the business files the form. The maximum annual fine is $556,500. If a firm willfully violates the requirement to give an accurate payee statement, it faces a minimum penalty of $550 per form or 10% of the income stated on the form, whichever is greater, with no maximum.
As an outsourced accounting firm, we stay current on tax developments and regulations in order to provide our clients with the best outsourced tax preparation services possible. And this will always be the case. Therefore, this tax season, sit back, relax and let us assist you with your taxes.