Form 1099-MISC is used to report certain types of payments made in the course of a trade or business. If you're in business or self-employed, you may need to submit this report to both the Internal Revenue Service and the person or business that you paid. The form is filed between January 1st and February 28th. So who gets a 1099? Every year this is a question that plagues many business owners.
Payment types are divided into categories (or boxes) on a 1099-Misc that are detailed below. Reporting is required if the recipient is an individual, a partnership, an LLC or a sole proprietorship. You are only required to report if the amount paid is $600 or more. But remember that the $600 is cumulative throughout the year and not per invoice!
You are not required to report payments made to tax-exempt organizations and for the most part, corporations; however, there are a few exceptions! 1099s must be issued to corporations providing the following services:
- Legal (any lawyer/attorney fees)
- Medical (doctors and other health institutions, including veterinarians)
- Health Care (long term care or hospitals)
- Fishing Boat Proceeds
One of the most reported items on the 1099-Misc is the reporting of rents of $600 or more for any of the following:
- Real estate rentals paid for office space. (Except if paid to a real estate agent and not directly to the property owner)
- Machine rentals (for example, renting a bulldozer). If the machine rental is part of a contract including both the use of the machine and the operator, the payment for the machine is reported as rent and the operator's charge is reported as nonemployee compensation.
- Pasture rentals (paying for the use of grazing land)
Royalties of $10 or more must be reported. You should report royalties from oil, gas, or other mineral properties before reduction for severance and other taxes that may have been withheld and paid. Surface royalties are categorized as rent. Likewise, oil and gas payment for a working interest are categorized as nonemployee compensation.
This is used to report $600 or more in payments that are not reportable in one of the other boxes on the form. Prizes, awards and personal injuries are the most common.
Medical and Health Care Payments
Enter payments of $600 or more made in the course of your trade or business to each physician or other supplier of medical health care services. There is no exception for corporations, but a 1099 is not required for tax-exempt facilities. You are not required to report payments to pharmacies for prescription drugs.
Non-employee Compensation (NEC) or Independent Contractor
By far the most reported area used by small businesses is for services performed by non-employees for repairs or maintenance and for fees, commissions, prizes and awards that you have paid in amounts of $600 or more. This includes work for plumbing, electrical, carpentry, equipment maintenance, accounting, gardening, horseshoeing, brand inspection and any other service you paid to anyone during the year that was not an employee. However, a 1099 is not required for payments for merchandise, telephone, freight, storage or similar items. Therefore, anyone you paid for trucking does not need a 1099.
The IRS provides the following examples of 1099-Misc recipients:
- Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.
- Fees paid by one professional to another, such as fee-splitting or referral fees.
- Payment for services and labor (including payment for parts or materials used to perform that service if supplying the parts or materials was incidental to providing the service). For example, report the total payment to an auto repair shop on an invoice showing a breakdown for labor and for parts, if furnishing parts was incidental to repairing the auto.
- Payments to nonemployee entertainers for services.
- Crop Share - amounts paid out of crop/livestock proceeds to another individual or business for their share
Gross Proceeds Paid to an Attorney
Another common item to report will be any gross proceeds totaling $600 or more paid to an attorney in connection with legal services in the course of your trade or business. The term attorney includes a law firm or other provider of legal services. And remember, corporations are NOT exempt in the case of payments made for legal services.
Crop Insurance Proceeds
Enter crop insurance proceeds of $600 or more paid to farmers by insurance companies unless the farmer has informed the insurance company that expenses have been capitalized under section 278, 263A or 447.
The 1099 process can be a bit overwhelming, but it is much easier if you collect the proper information as you pay for services throughout the year. You will need the name, address, tax identification number, the cumulative amount paid over the year and the type of payment (rent, NEC, royalty, etc). Use IRS form W-9 (obtained by following this link form W-9 to collect the information required for each 1099-Misc. It’s easy to hand a subcontractor a W-9 before handing them the signed check for payment. Remember, if ever in doubt, issue the 1099. There is nothing wrong with issuing when you didn’t need to, but you will face penalties if you don’t issue a 1099 when it is required.
At Gardner & Billing CPAs, 1099 filing is one of the services we offer our clients. It’s still helpful if you are able to provide the necessary information for your 1099 recipients, but if you prefer to let us make the call on who should receive one, just bring in your farm book or bank statements.
For more information please contact our office, or follow this link to the IRS 1099 Miscellaneous instructions: http://www.irs.gov/pub/irs-pdf/i1099msc.pdf