Year-End Planning: Form 1099

Now that you’ve become an expert in filling out your W-2s correctly (still not quite sure? Here you go!), it’s time to talk about another type of FORM. Get excited.

Form 1099

Businesses make certain payments to nonemployees during a calendar year. When they do this (you guessed it), they must furnish annual information returns both to the IRS and to the nonemployee recipient of the payment.

As a reminder, an information return is a document used for reporting purposes based on certain transactions incurred throughout the year. Information on these forms is used to assist both the taxpayer (you and the nonemployee party) in preparing to file taxes, as well as the IRS to match records to the taxpayer’s tax return.

In order to facilitate the reporting of these payments, IRS has developed the Form 1099 Series, which is a group of forms used to report ordinary kinds of payments made by a business, such as dividends, interest, retirement distributions, and miscellaneous income payments.

Wait … what?

While W-2 reports wages, salaries and tips, Form 1099-MISC, “Miscellaneous Income” is filed by a business for certain payments made to nonemployees (remember the difference?) in the course of trade or business.

What exactly does trade or business mean?

Trade or business generally refers to an entity that operates for gain or profit. However, it’s not that simple. Nonprofit organizations are also subject to these reporting requirements. Other organizations/items subject to the reporting requirement also include:

  • Trusts of qualified 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
  • Widely held investment trusts
  • Payments made by federal, state or local governments

When is Form 1099-Misc required exactly?

Form 1099 is required in a number of circumstances, including:

  • $10 or more in royalties or broker payments in lieu of dividends or tax–exempt interest;
  • $600 or more in:
    • Rent
    • Services, including parts and materials
    • Prizes and awards
    • Other income payments
    • Medical and health care payments
    • Crop insurance proceeds
    • Cash payments for fish you purchase from anyone engaged in the trade or business of catching fish (we’re not kidding)
    • The cash paid from notional principal contract to an individual, partnership, or estate
  • Any fish boat proceeds (again, not making this up)
  • Gross proceeds to an attorney
  • Reporting of direct sales of at least $5000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment
  • Any backup withholding regardless of the amount of payment.

This form is seriously required? 

Yep! The form is required for each person to whom payments have been made during the year.

So everyone has to fill this thing out?

Not quite. There are certain payments where Forms 1099 are not required:

  • Generally payments to a corporation
  • Payments for merchandise telegrams (yes, it’s a thing), telephone, freight, storage and similar items
  • Payments of rent to real estate agents
  • Wages paid to employees (report on Form W-2. Learn more about that one here)
    • Other items not included on Forms 1099, but are included on W-2:
      • Military differential wage payments made to employees while they are on active duty in the Armed forces or other uniformed services
      • Business travel allowances paid to employee (may be reportable on W-2)
      • Cost of current life insurance protection (report on Form W-2 or Form 1099-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing plans, IRAs, Insurance Contracts, etc.)
  • Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government
  • Payments made to or for homeowners from the HFA Hardest Hit Fund or the Emergency Homeowners’ Loan Program or similar state program.
  • Payments made with a credit card or payment card and certain other types of payments, including third party network transactions
    • These ones go on a different form, known as the Form 1099K
  • A payment to an informer as an award, fee, or reward for information about criminal activity
    • Yep, you don’t have to fill this form out if you were being a good Samaritan, as long as the payment is made by a federal, state, or local government agency, or by a nonprofit organization exempt from tax under section 501(c)(3) that makes the payment to further the charitable purpose of lessening the burdens of government.
  • Scholarship or fellowship grants. Why, you might ask. Well scholarship or fellowship grants are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant.
    • So where might this one go? If you guessed W-2, you’re exactly right. They are considered wages and must be reported on Form W-2. Other taxable scholarships or fellowship payments (to a degree or non-degree candidate) are not required to be reported to the IRS on any form.
  • Difficulty-of-care payments that are excludable from the recipient’s gross income are not required to be reported. Difficulty-of-care payments to foster care providers are not reportable if paid for not more than 11 children under age 19 and not more than six individuals age 19 or older.
  • A canceled debt is not reportable on Form 1099-MISC. That one goes on a different form (yes, there really are a lot of forms), known as Form 1099-C.

This makes NO SENSE. Head hurts.

Tax reporting is complex and multi-faceted. This stuff isn’t easy and, frankly, stumps quite a few of us (and we’re accountants). So don’t be afraid to ask.

 

 

 

4 comments on “Year-End Planning: Form 1099

  1. […] Nope. Determining what type of individuals you’re using is necessary for filling out tax forms. If you have employees, their payments will be reported on Form W-2. If you have independent contractors, they’ll be reported on Form 1099-MISC. […]

    Like

  2. […] At the heart of the tax form journey are two very important ones that have to do with reporting worker wages and income: W-2 and 1099 (sound familiar? We talked about them here, here and here). […]

    Like

  3. […] 1099s – There is a series of information returns, referred to as 1099s, that all business are required to file to report various types of activity. Examples are 1099-INT to report interest, 1099-DIV to report dividends, 1099-MISC to report rent, non-employee compensation, and various other types of income. The list is goes on and on! […]

    Like

  4. […] Why the change? The IRS is complying with a new federal law, which is trying to make it easier for them to detect and prevent fraud. This rule also applies to Form 1099-MISC (here’s your reminder). […]

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s