1099-MISC is a form you’ll use to report miscellaneous income and expenses to the IRS. If you run a business, the 1099-MISC probably sounds familiar. Almost every business has some miscellaneous expenses, whether it’s rent for office space or payments to an attorney for business-related services.
There have been some important updates to the form—effective starting in tax year 2020 (which is filed in spring of 2021)—that you’ll want to know in order to avoid any mistakes that lead to penalties.
The biggest change to the 1099-MISC form is that payments over $600 that are made to nonemployees (such as independent contractors) is no longer reported in box 7 of the 1099-MISC. That information now gets filed on a 1099-NEC.
In this post, we’ll cover all the 1099-MISC basics and the new updates.
Who needs a 1099-MISC?
You’ll fill out and file a Form 1099-MISC for each person (not corporation) to whom you’ve paid $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest.
You’ll also fill out and file a Form 1099-MISC for each person (not corporation) to whom you’ve paid $600 or more in: rents, prizes and awards, other (miscellaneous) income payments, medical and healthcare payments, crop insurance proceeds, cash payments for fish (or other aquatic life) you purchased from anyone engaged in the business of catching fish, fishing boat proceeds, payments to an attorney, and cash paid from a notional principal contract to an individual, partnership, or estate. In addition, use Form 1099-MISC 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. Confused? Don’t worry. We’ll describe each of these in detail in the section on how to fill out the 1099-MISC below.
In the meantime, you should also know that the type of business you pay and how you pay will impact whether or not you need to fill out the 1099-MISC.
- Payment Method: If you make payments via credit card, debit card, or a third-party network like PayPal, you may not need to worry about the 1099-MISC. In these situations, the third-party network or payment card issuer (not you) may need to file a Form 1099-K instead.
- Business entity: If your payment is to a corporation, you can generally skip the 1099-MISC. This includes limited liability companies (LLCs) that are treated as a C or S corporation. You can find this information on their W-9. And you don’t need to file the form if you’ve made eligible payments to a tax-exempt organization or a government agency.
How do I fill out a 1099-MISC?
Starting at the top, enter in the payer’s address and telephone number, then your TIN.
Recipient’s TIN: This is where you enter the recipient’s social security number or employer identification number. If the entity is a single member LLC or sole proprietorship, the social security number should be entered for the TIN. If you do not have this information and file the 1099-MISC, you will receive a CP2100A notice from the IRS.
Boxes 1-14: Excepting box 7 (which doesn’t require a monetary amount), fill out the correct amounts for the applicable sections as described below:
- Rents. If, for instance, you pay rent for your office to a landlord, you’d file a 1099-MISC. If you rent space from a corporation, real estate agent, or property manager, you typically won’t file a 1099-MISC.
- Royalties. These are made from intangible property, including patents, copyrights, and trade names, payments from oil, gas and mineral properties, and payments to authors or artists for use of their works.
- Other income. Items that fall into the other income categories are for any other payments made over $600 that don’t correspond to another box on the 1099-MISC as well as any prizes or awards that are not for services performed, including the fair market value of any merchandise won on a game show.
- Federal income tax withheld. Any federal income tax withheld related to any 1099-MISC payment is included in this box. If the recipient did not provide their TIN and has amounts reported in box 1, 2, 3, 5, 6, 8, 9, or 10, you are required to withhold federal income tax on those amounts.
- Fishing boat proceeds. If any amount was paid out from a sale of a catch or fair market value of a distribution in kind to any crew member of a boat with less than 10 crew members, it needs to be reported here.
- Medical and health care payments. If, in the course of doing business, you pay individuals for healthcare-related services (e.g. drug screening), you would record those payments here. Note that this does not apply to payments made for healthcare premiums or payments to pharmacies.
- Payor made direct sales totaling $5,000 or more of consumer products to recipient for resale (check if yes). For this one, you just need to check the box if you made direct sales of $5,000 or more to a recipient for resale, and then provide a separate report of those direct sales transactions.
- Substitute payments in lieu of interest. If there were any payments made in lieu of dividend or tax exempt interest, these payments need to be provided here. This typically applies when there is a loan of a customer’s securities and interest is accrued as a result.
- Crop insurance proceeds. If an insurance company made payments in excess of $600 to farmers for crop insurance proceeds, the insurance company needs to report the amounts in box 9 and provide the 1099-MISC to the farmer.
- Gross proceeds paid to an attorney. This does not actually mean all payments to any attorneys. For instance, you won’t likely need to provide a 1099-MISC to your personal divorce attorney, but you’ll need to report the payments you made to the attorney that reviews your employee handbook and drafts your company offer letter template. In other words: report attorney services related to your business. There’s more fine print related to this one, so if you have any complex legal situations (business-related settlements, for instance aren’t usually reported in box 10), you’ll want to sync up with your CPA and familiarize yourself with IRS section 6045(f).
- Fish purchased for resale. This refers to any purchases of aquatic life from anyone engaged in the trade or business of catching fish.
- Section 409A deferrals. First, check Notice 2008-115, as you may not need to fill out this section. If you’re among those who need to fill it out, here are the instructions from the IRS, word for word: “If you complete this box, enter the total amount deferred during the year of at least $600 for the nonemployee under all nonqualified plans. The deferrals during the year include earnings on the current year and prior year deferrals. For additional information, see Regulations sections 1.409A-1 through 1.409A-6. For deferrals and earnings under NQDC plans for employees, see the Instructions for Forms W-2 and W-3.”
- Excess golden parachute payments. Reporting amounts in this box means that you have made payments in excess of the base amount of average annual compensation for services includable in the individual’s gross income over the last five years. Parachute payments consist of compensation payments made to a disqualified person relating to a change in control of a corporation that have an aggregate present value of at least three times the individual’s base compensation amount.
- Nonqualified deferred compensation Any deferred compensation payments made that are includable in income under section 409A because the nonqualified deferred compensation plan fails to meet the requirements of section 409A.
- Prizes and awards. Prizes and awards received by employees are usually reported on the W-2. For all others, it’s usually reported on the 1099-MISC and fair market value can be used for non-cash prizes.
How and when should I file the 1099-MISC?
Provide a copy of the 1099-MISC to the payee by Jan. 31. You’ll need to send a copy to the person (or company) to whom you made the payment so they can use it to file their taxes. The deadline for this is January 31, or the following Monday if Jan. 31 falls on a weekend.
File with the IRS by March. If you file via paper, be sure to have your 1099-MISC postmarked by March 1. Any 1099-MISC that is filed via paper requires a form 1096 to be filed with the 1099-MISC. If you file electronically, March 31 is your deadline.
What about state filing requirements?
If you are required to file the 1099-MISC in a state that participates in the combined federal/state filing program and/or if you are required to file paper copies of the 1099-MISC with a state tax department, you can use boxes 15-17 to report state tax withholdings. This is not required for the IRS filing. Box 15 is used to report any state tax withheld, box 16 is used to identify the state, and box 17 is where you can report the state tax.
Are there penalties for filing late?
If you do not file your 1099-MISC forms electronically by March 31 and you were required to do so for your business, you could be subject to a penalty starting at $50 per 1099-MISC you should have filed. These penalties can increase up to $270 per form, so it is important to identify if you are required to file any 1099-MISC forms and then file them timely.
To help things go more smoothly come tax time, keep track of your payments, and use this 1099 checklist to make sure you’re on top of things from the get-go.