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1099-MISC: WHAT IS IT AND WHO FILES IT?

A business files a 1099-MISC (miscellaneous income) for any independent contractor or freelance agent it has paid more than $ 600 in a year for services rendered or more than $ 10 in royalties.

The 1099-MISC is only applicable for trade and business services and not miscellaneous income for non-trade/business services. The $ 600 minimum threshold applies to:

  • rent payments
  • services performed by someone not permanently employed by the company
  • prizes and awards
  • medical and healthcare payments
  • crop insurance proceeds
  • cash payments for the supply of fish
  • payments to an attorney
  • any fishing boat proceeds

The 1099-MISC is also used by organisations who manage trusts of qualified pension or profit-sharing plans of employers.

WHAT IS AN INDEPENDENT CONTRACTOR?

According to the IRS, an independent contractor is anyone a company hires on a contract basis to complete a particular project or assignment.

An independent contractor is not an employee; payment dates are not set and when the project or assignment is complete, the contractors services are no longer needed by the company. Examples include builders, handymen, landscapers, graphic designers, social media consultants, market research agents, attorneys, HR consultants etc.

Note: If you hire an independent contractor through a third-party service, you are not required to submit a 1099-MISC for them. The third-party is responsible for that.

WHAT INFORMATION DOES 1099-MISC RECORD?

In most cases, only Box 7 in the 1099-MISC is filled in to report total payments made to an individual or firm not permanently employed by the company. Other boxes report different forms of miscellaneous income:

Box 1: Rent paid
Box 2: Royalties paid
Box 3: Prize or award money
Box 4: Federal tax withheld
Box 5: Income earned from fishing
Box 6: Money paid for healthcare
Box 7: Money paid to an independent contractor or freelance agent for services rendered
Box 8: Payments of $ 10 or more for substitute payments in lieu of dividends or interest
Box 9: Direct sales of $ 5 000 or more
Box 10: Money paid by an insurance company to a farmer under certain circumstances
Box 11: Foreign tax paid on income listed on the 1099
Box 12: The name of the country to which you paid foreign tax
Box 13: Payments in excess of the golden parachute amount
Box 14: Income paid to an attorney (more than $600)
Box 15 (a&b): Contributions to a section 409A retirement plant
Box 16: Provided only to track state income information
Box 17: State/Payer’s state number
Box 18: State income

DOWNLOAD 1099 FORMS HERE

1099-MISC EXEMPTIONS

Payments that are exempt from the 1099-MISC include:

  • payments to a corporation (including a LLC)
  • payments for merchandise, telecommunication, freight, storage and similar items
  • payments of rent to real estate agents or property managers
  • wages to employees
  • military differential wage payments made to employees while on active duty in the Armed Forces or other uniformed services
  • business travel allowances paid to employees
  • cost of current life insurance protections
  • payments to a tax-exempt organisation
  • payments to homeowners from the HFA Hardest Hit Fund or similar state program
  • compensation for injuries or sickness by the Department of Justice as a public safety officer disability or survivor’s benefit, or under a state program that provides benefits for surviving dependents of a public safety officer
  • compensation for wrongful incarceration for any criminal offense
  • scholarship or fellowship grants

HOW TO FILE THE 1099-MISC

The company

Copy A
Must be filed with the IRS by no later than 28 February; or 31 March if using electronic filing.
Copy B and Copy 2
Must be sent to the independent contractor via mail or hand delivered no later than 31 January.
Copy C
Kept on file by the company
Copy 1
Required by your state tax authority if your state has a state income tax. The filing deadline in most states in America is 28 February. Check with your state department because some state tax departments require earlier filing.

The independent contractor

You receive the 1099-MISC from the company that hired you. You don’t need to submit it again to the IRS. Keep it on file and use it to complete your federal tax return.

PENALTIES FOR NOT FILING THE 1099-MISC

The business owner is responsible for completing a 1099-MISC for each independent contractor who meets the $10 royalties and $600 payment rule during the course of the tax year. The business owner is responsible for providing the independent contractor with a copy and filing the 1099-MISC with the IRS.

Failure to do so will result in a hefty penalty fine; ranging from $30 to $100 per outstanding form. The penalty fee increases the longer the form is overdue. The minimum penalty for blatantly disregarding the obligation to file the 1099-MISC is $250 per statement. There is no maximum amount so the penalty cost will add up the longer the business owner takes to file the form.

WHERE DO YOU GET THE 1099-MISC?

The 1099 forms are pre-printed in triplicate by the IRS and dated. You must use the correct form for the current year; marked on the forms on the bottom in black lettering.

You have the following options:

  • order the forms you need from the IRS and collect from the IRS service centre
  • purchase the forms from the post office or a stationary outlet
  • purchase them online from a reputable source

You can file any 1099 with the IRS using the FIRE System (Filing Electronic Returns Electronically) online.

DOWNLOAD 1099 FORMS HERE

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