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.
If you’re a freelancer or run a small business and use independent contractors, you’re probably familiar with the 1099-MISC form. Before 2021, this form was used to report income to freelancers, independent contractors, and other self-employed individuals who, as their own employer, are generally responsible for paying the employer’s and employee’s portion of taxes.
Starting with the 2020 tax year, the Internal Revenue Service (IRS) requires businesses to use form Form 1099-NEC to report those payments.
Thanks to Form 1099-MISC’s versatility, businesses and clients still use it for many different kinds of transactions. It’s very useful, but also potentially confusing because of all the data it can hold.
Understanding the IRS Form 1099-MISC Boxes
A 1099-MISC form is a catchall for all miscellaneous income that you provided or received. In an attempt to get all the necessary information for any situation, the IRS uses 17 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.
If you rented anything from another company — office space, heavy machinery, soda machines, or live tigers — total up the year’s payments and list them here.
This includes all royalty payments, such as those from oil or mineral-producing properties.
3. Other Income
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.
4. Federal Income Tax Withheld
The issuer uses this section if they withheld federal income taxes from the payments reported on Form 1099-MISC. Usually, this occurs when the payee refuses to provide their Form W-9 and Social Security number or taxpayer identification number (TIN).
Just to be on the safe side, the IRS requires the payer to withhold 28% of the money paid to that person and send it to the IRS. See the Form 1099-MISC instructions for further explanation on what income you can withhold taxes on.
5. Fishing Boat Proceeds
Here you 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.
6. Medical and Health Care 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 for medications sold to you by the physician.
For example, if the physician charged you $20 per flu shot and $200 for labor, you would include the total for both the cost of the shots and the labor in this amount.
7. Payer Made Direct Sales of $5,000 or More
Box 7 used to be used to report payments made to independent contractors or freelancers. Now that those payments go on Form 1099-NEC, Box 7 is now a checkbox used to indicate that the filer made direct sales of $5,000 or more of consumer products to the recipient.
The most common users of this box are multilevel marketing companies that sell products to their sellers at wholesale prices to be resold.
8. Substitute Payments in Lieu of Dividends or Interest
This situation is extremely uncommon and involves loaning out your dividend-paying securities.
This box doesn’t include typical dividend or interest income, because those have their own forms: Form 1099-DIV and Form 1099-INT. If you need to use this section, your broker should send you the details.
9. Crop Insurance Proceeds
If you received payouts from crop insurance, the amount should be input here.
10. Gross Proceeds Paid to an Attorney
Here you must input payments over $600 that went to an attorney for legal services.
11. Fish Purchased for Resale
On the 2020 version of Form 1099-MISC, Box 11 is blank. But in the 2021 version, it will be used by taxpayers involved in a fish catching business to report cash payments for the purchase of fish that will be resold.
12. Section 409A Deferrals
Use this box if you contributed to a section 409A retirement plan but weren’t an employee.
13. Excess Golden Parachute Payments
A golden parachute payment is one made to an employee (generally an executive) who is leaving a company and is contractually able to receive a large payment upon departure. Excess payments are those amounts above what the individual received on average over the past five years.
14. Nonqualified Deferred Compensation
If you contributed to a section 409A plan but it didn’t meet specific guidelines, it can be counted as taxable section 409A income, and you must input the amount here.
15. State Tax Withheld
If any state tax was withheld, it may be listed here.
16. State/Payer’s State Number
If state tax was withheld, enter the identification number of the company that withheld the tax here.
17. 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 form 1099 only if you paid someone $600 or more over the course of the year. If you received more than this amount, expect a 1099-MISC from the payer.
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 (such as Amway or flea markets), you must report it.
- Tax Withholding. If you’ve withheld taxes for someone because they were subject to backup withholding, you must report it 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.
Taxes Due From Income Included on 1099-MISC
In prior years, when the 1099-MISC form included non-employee compensation, recipients typically had to report business income from their 1099-MISC on Schedule C, and file Schedule SE to calculate self-employment tax. Now, most 1099-MISC income goes elsewhere on your tax return.
If your income was reported in box 3 of your 1099-MISC, it is generally not considered “earned income” and you do not need to pay self-employment tax on it. However, you do need to pay regular income tax on it.
Report income in box 3 of your 1099-MISC plus these other types of income on your 1040:
- Prizes or Awards. This includes game show or sweepstakes winnings, but not something like an incentive-based contest you won at work.
- Jury Duty Pay. Jury duty pay is taxable as a write-in adjustment to income on your 1040. Label it “Jury Pay.”
- Canceled or Forgiven Debts. Your creditor is required to send you a 1099 with the forgiven or canceled amount. You might receive a 1099-C for this.
- Barter Income. This counts even if cash didn’t trade hands. If you barter with someone who is a by-the-books type, they may send you a 1099-MISC for the value of the services or items they traded with you. Of course, this is your cue to send one for the value of the services or items you traded as well.
- Hobby Income. This is the little bit of money you might earn from a leisure activity — one you do without intending to make any money. Because you weren’t looking for income, it’s not considered self-employment. Still, you’re required to pay regular income tax on it. After three profitable years of making money at a hobby, the IRS will consider it a small business and no longer a hobby.
- Gambling Winnings. You may not receive a 1099-MISC — you might get a W-2G — but either way, you should include gambling winnings on your 1040. If any income tax was withheld, as sometimes happens with large payouts, you’ll also account for this on your 1040. If you had winnings, you can deduct gambling losses, but only up to the amount you won.
You may encounter a confounding situation with one or more 1099-MISC forms you receive. Here are a few of the most common:
1. I received a 1099-MISC for income I wasn’t paid until the following calendar year. What do I do?
If this happens to you, don’t worry. The IRS knows you are not the first person who’s been on the end of some last-minute accounting. As long as you “settle up” next year and accurately report the income on that year’s taxes, you will be fine. Hold onto documentation that supports when you took possession of the money, such as:
- Bank account records
- Postmarked envelopes
- PayPal records
- Invoices, paystubs, or other records of payments
2. I got a 1099-MISC for money that was paid to me, but I paid other people with that money. What do I do?
That depends on the type of expense you paid. If the payment of that money has anything to do with a rental property, you can probably deduct it as a rental expense on Schedule E.
For example, if you own rental real estate and paid money to a property manager, contractor, or another service provider, you can claim the sum of what you paid as an expense against the rental income you received on your 1099-MISC.
Likewise, if the payment was an ordinary and necessary business expense, you can deduct it on Schedule C.
However, if you received a 1099-MISC and it was actually taxable income for someone else, you’re considered a “nominee recipient.”
For example, say you and your sibling are 50/50 owners in a rental property. Your tenant issues a 1099-MISC for the $12,000 of rent they paid for for the year. However, the 1099-MISC shows you as the sole recipient of $12,000 of rental income instead of showing you received $6,000 and your sibling received $6,000.
In such a situation, you need to send a 1099-MISC to your sibling, listing yourself as the payer and your sibling as the recipient of $6,000 of rental income. You can find more instructions for nominee recipients in the IRS’s General Instructions for Certain Information Returns.
3. I haven’t received my 1099-MISC yet. Should I file my tax return anyway?
The due date for payers to send 1099 forms to recipients is typically Jan. 31 following the calendar year in which the payments were made. For 2021 forms, that deadline shifted to Feb. 1, since the normal filing deadline fell on a Sunday.
According to the IRS, if you haven’t received your expected 1099 form by early February, you should contact the payer. If you still can’t get a copy of your Form, you can call the IRS for help at 1-800-829-1040.
In some cases, you may be able to get the information that would be included on Form 1099-MISC from another source. For example, if you’re expecting a 1099-MISC for rental income, you should already have a record of the rental payments you received during the year and you can just report the taxable income based on your own records.
Unlike Form W-2, you don’t have to file Form 1099-MISC with your tax return (unless you file paper forms and your 1099-MISC includes federal income tax withheld).
If you file your tax return and later receive a 1099 for income that you didn’t include on your return, you can file an amended return using Form 1040X.
“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 can create confusion as well.
If this is your first year owning a business and dealing with 1099s, it’s worth hiring a tax consultant to make sure you take advantage of all deductions available to you and you schedule the correct amount of estimated taxes for the following year.