In an effort to help make filing taxes easier this year, we are breaking down the various IRS tax forms to help you know if you need them, and how to use them.
With nearly two dozen types of 1099 forms, you’d think the IRS would have a category for every type of income. But no one can predict all the ways to make money, so if you run a small business and you pay independent contractors, you probably use a 1099-MISC form. And in turn, if you’re a freelancer or if you made some extra cash last year, you’ll have to consider a 1099-MISC when you file your income taxes.
Thanks to its versatility, businesses and clients use the 1099-MISC form for many different kinds of transactions. This means it’s useful but also potentially confusing because of all the data it can hold.
What Are the Boxes About?
A 1099-MISC form is a catchall for any kind of miscellaneous income that you provided or received. In an attempt to get all the necessary information for any situation, the IRS uses 18 boxes to collect data. If you’re a payer, you need to know which fields to fill out. And if you’re filling your tax return, you’ll want to know what your numbers mean.
Box 1 – Rents: If you rented office space, heavy machinery, soda machines, or live tigers from another company, total up the year’s payments and list them here.
Box 2 – Royalties: This includes all royalty payments, like those from oil or mineral-producing properties, even though they can’t carry a tune.
Box 3 – Other income: Anything that isn’t anything else. This can include prizes (but not gambling winnings, as they have their own 1099 variant), damages from a lawsuit, or payments for participating in medical research.
Box 4 – Federal income tax withheld: This section usually comes into play when you have to send a 1099 to someone who has refused to provide their W-9 with their tax identification number. Just to be on the safe side, the federal government requires you to withhold 28% of the money and send it to the IRS, to prevent the person from not reporting the income on their taxes. The IRS would find it nearly impossible to match up the 1099 to the taxpayer without their tax ID number. In all other situations, it’s up to the person who receives the 1099 to figure out how to pay their taxes. See the Form 1099-MISC instructions for further explanation on what income you can withhold taxes on.
Box 5 – Fishing boat proceeds: Here you would report the monetary value of the catch shares that the individual received over the year, plus any other payments made that were contingent on a minimum catch.
Box 6 – Medical and healthcare payments: If your business employed a physician to conduct yearly physicals or administer flu shots, you might have to send them a 1099-MISC. This would include any amount you paid them for medications they sold to you. For example, if the physician charged you $20 per flu shot and $200 for labor, you would also include the $20 per flu shot on this amount.
Box 7 – Nonemployee compensation: Here’s where all the independent contractors come in. If anyone did work for your business but wasn’t an employee, you’ll report what you paid them here. You aren’t required to send them a 1099 unless you paid them $600 or more during the year. Generally these amounts will be subject to self-employment tax. Golden parachute payments, taxable fringe benefits for employees, and referral fees will also appear here.
Box 8 – Substitute payments in lieu of dividends or interest: This situation is extremely uncommon and involves loaning out your dividend-paying securities. If you need to use this section, your broker should send you the details.
Box 9 – Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale: This is just a checkbox. You aren’t required to report exactly how much you sold them, just that you sold them a lot. This box is useful for organizations like Amway, since they sell items for resale outside of a traditional retail environment.
Box 10 – Crop insurance proceeds: If you received payouts from crop insurance, they would appear here, and you would receive this from the insurance company.
Boxes 11 and 12: They are blank. One assumes they are happier this way.
Box 13 – Excess golden parachute payments: A “golden parachute” payment is one made to an employee leaving a company – generally an executive – who is contractually able to receive a large payment upon their leaving. Excess payments are those amounts above what the individual received on average over the past 5 years.
Box 14 – Gross proceeds paid to an attorney: Enter payments over $600 that went to an attorney for legal services here.
Box 15a – Section 409A deferrals: Use this box if you contributed to a section 409A retirement plan but weren’t an employee.
Box 15b – Section 409A income: If you contributed to a section 409A plan but it didn’t meet specific guidelines, it can be counted as taxable income, and you’d include it here.
Box 16 – State tax withheld: If any state tax was withheld, you can write that in yourself, but this information isn’t supplied to the IRS.
Box 17 – State/Payer’s state number: If state tax was withheld, you would enter the identification number of the company that withheld the tax here.
Box 18 – State income: This is the amount of money reported on the form that is subject to state tax.
When Does Your Business Need a 1099-MISC?
Generally, your business must file a 1099-MISC only if you paid someone $600 or more over the course of the year. A few exceptions include:
- Royalties: $10 minimum reporting threshold
- Fishing boat proceeds: You must report any amount
- Consumer goods: If you sold anyone any items for $5,000 or more in a market other than a permanent retail establishment (like Amway or flea markets)
- Tax withholding: If you’ve withheld taxes for someone because they were subject to backup withholding, no matter how little you paid them during the year
Keep in mind that the IRS only requires these forms when companies pay vendors in the course of operating a business. When you pay the neighbor kid for babysitting, you don’t have to worry about reporting those payments.
“Miscellaneous” is like a double-edged sword when it comes to a 1099 form. It’s an easy way to cover tax issues that don’t fall into conventional categories, but it’s not as simple as just marking off an “Other” checkbox and moving on. You still need to work through complex language and find the right fields for your numbers.
If you’re a seasoned business owner, this form may come as second nature at this point. But if this is your first year owning a business and dealing with 1099s, it’s worth taking on the expense of a tax consultant to make sure you get it right.
What miscellaneous income have you had to cover with a 1099-MISC?
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