Form 1099-Misc

Source: Steven Mercatante, Esq., TIR Consulting

Form 1099-Misc ranks far and away as the most ubiquitous Form 1099 for reporting purposes. In spite of this distinction perhaps no other form generates more questions.

Who receives the 1099?

The biggest difference in 1099 reporting can take place between paying an entity or an individual. LLCs, DBAs, and Sole Proprietorships can be particularly challenging to report. For example, with an LLC, reporting is directed at the entity if there are multiple members, but with a single membership, the reporting is sent directly to the individual behind the entity. To help reduce some of the complexities involved in 1099 reporting, be sure to identify the payee and the payment type separately. Both the payment type and the payee have separate standards for determining what should be reported.

Taxable income and reportable income aren’t always exactly the same. For example, total payments less than $600 may represent taxable income for the individual, but it is not considered reportable income because it does not meet the minimum threshold for reporting. Payments must be made in the ordinary course of trade or business. When determining the reporting threshold, all means of payment sources, including accounts payable, payment cards, petty cash, wire transfer, should be combined into the total. Even bartered transactions could be considered reportable payments that should be included when determining the total amount paid to another entity. Some payees might have received multiple payment types.

Payments to exempt recipients, merchandise, telephone, freight storage, employee wages or reimbursements, life insurance protection costs, distributions from pensions, retirement plans, scholarships or fellowships, cancellation of debt and more

1099-Misc Box 1: Rent

These requirements extend well beyond real estate rent. For example, leased office space, bulldozers, other types of equipment can all qualify as rented items. Not all leased items are reportable. The two types of leases, capital agreements and operating agreements, create major differentiations in 1099 reporting requirements. Of these two, only the operating agreement requires 1099 reporting. The capital agreement lease is similar to “rent-to-own” agreements. At the end of the capital lease agreement, the lessee takes full ownership of the property or equipment. In the operating agreement, payments are made for a specified amount of time in which the lessee has the right to make reasonable use of the equipment as long as payments are made. At the end of the agreement, the lessor still owns the property. Exceptions include payment of rent to a real estate agent. The standard $600 reporting threshold applies to rental payments.

1099-Misc Box 2: Royalties

Royalty payments include payments for the right to exploit natural resources on a property for mining, extraction or other purposes as well as the right to exploit intangible property resources such as copyrights, trademarks and patents. The use of intellectual property rights, for example, software licensing agreements, is also considered reportable income in Box 2 of the 1099-MISC. A special $10 minimum reporting threshold applies to royalty payments.

Note that surface royalties are reported using Box 1 instead of Box 2 where as working interests in oil and gas extraction are reported in Box 7 (see IRS code section 1.469-1). Pay-as-cut timber royalties are repoted on Form 1099-S.

1099-Misc Box 3: Other Income

Prizes and awards not for services performed. Examples of this type of income including cash and prizes from participating in television game shows. Many open-entry contest prizes include this type of income on the fair market value of the prize. However, contests where a service was performed, an annual sales contest, for example, should be reported on 1099-Misc Box 7. Also note that gambling winnings are reported using Form W-2G.

Box 3 reporting also includes most taxable damage awards for cases other than taxable back pay, physical injury or medical expense. The three parties involved include the claimant and fee-for-service attorneys for both parties. Only the claimant is reported using Box 3. Attorneys are reported using Box 7 or Box 14. Taxable back pay should be reported using Form W-2, and interest awards use Form 1099-INT.

Backup withholding may apply to all of these types of payments. Payers must get the name and TIN for all individuals and entities named on the check or other method of payment. Physical damages are reportable, but damages for emotional distress on account of physical injury are not reportable. Deceased employee wages paid to an estate or beneficiary in the calendar year of death are considered reportable income for IRS Form W-2 and IRS Form 1099-MISC. After the year of death, reporting is done only on form 1099-MISC. Keep in mind that 1099-Misc Box 3 is used by a broad variety of income types, and the income types above describe only part of the reportable types of income that require Box 3 reporting. The standard $600 reporting threshold applies to other income payments.

1099-Misc Box 4: Federal Income Tax Withheld

In some cases, the IRS may require automatic backup withholding for payees where the name and TIN are unavailable or inaccurate. The gross amount of income should be reported in the appropriate box, and the total amount withheld should be reported in Box 4 of this form. The current backup withholding rate is 28%. A correctly completed report would look like this: Box 3: $10,000, Box 4: $2,800, where the amount of income was $10,000, but the payee receives $7,200 after backup withholding. Any payment where backup withholding was performed requires reporting even if the minimum threshold has not been met.

1099-Misc Box 5: Fishing Boat Proceeds

Payments that are reported in Box 5 included payments to small fishing crews where earnings are based on providing a portion of the catch itself, proceeds of the catch or fair market value of the catch. It also includes payments of up to $100 in cash that are contingent on minimum catch. There is no minimum reporting threshold for fishing boat proceeds.

1099-Misc Box 6: Medical and Health Care Payments

The corporate exemption does not apply, but the exemption for generally tax-exempt entities does apply. Payments to pharmacies for prescription drugs or to insurance companies for premiums paid on fully-insured health coverage are not included here, but payments made by insurance companies to medical service providers are included. Where charges include both goods and services, report the entire payment. For example, a doctor or nurse billing for flu vaccine administration would receive reporting on both the flu vaccine itself and their service of injecting the flu vaccine assuming that the same entity charged for both goods and services. Medical and health care service providers are rather broadly defined for usage of Box 6. For example, any payee that offers medical and health care services, including drug screening, expert testimony, and lab services, as a primary business function should be reported using Box 6. The standard $600 reporting threshold applies to medical and health care payments made to service providers.

1099-Misc Box 7: Non-Employee Compensation

Services that are rendered in a non-employee capacity are subject to self-employment tax and include payments made to board-of-director chair holders, attorneys performing services directly for the payee, taxable fringe benefits and expense reimbursements. Additionally, payments made for exchange of services between entities in the course of trade or business, including barter exchanges. Other payment types include golden parachute payments, oil and gas working interests, fish purchases for cash, commissions for lottery ticket sales agents. The corporate exemption does not apply to attorney fees, fish purchases for cash, payments made by a federal executive agency. The standard $600 reporting threshold applies to medical and health care payments made to service providers.

1099-Misc Box 9: Direct Sales of Consumer Products for Resale

Box 9 includes payments made by door-to-door salespersons, online sellers, telemarketers, direct mailers, and so on. Do not enter a dollar amount for this box. The minimum reporting threshold for this box is $5,000 in annual payments.

1099-Misc Box 10: Crop Insurance Proceeds

Box 10 is typically used by insurance companies making payments to farmers in relationship to the farmer’s crop insurance property. The income is exempt is the farmer notifies the insurance company that expenses have been appropriately capitalized. The standard $600 reporting threshold applies to crop insurance proceeds reported on Form 1099-MISC.

1099-Misc Box 14: Gross Proceeds Paid to an Attorney

This box is typically used for payments made to a claimant’s attorney in conjunction with a court judgement against a defendant. Attorney is broadly defined to include any provider of legal services such as law firms, paralegals, court reporters, and so on. Legal services refers to any service offered under the supervision of an attorney including related services. The corporate exemption does not apply for payments made to attorneys. Applicable exemptions include wages paid to an attorney as wages, which should be reported on Form W-2, and payments by the entity to its own defendant, which should be reported on 1099-Misc Box 7. Additionally, payments to any nonresident alien are excluded because they are reported on Form 1042-S. Additional exclusions for specific types of legal services and relationships apply as well. The standard $600 reporting threshold applies to gross proceeds paid to an attorney.

1099-Misc Box 15a and 15b: Section 409A Deferrals and Income

Non-qualified deferred compensation is generally reported using Box 15 of 1099-MISC. Deferred compensation occurs when compensation is earned in one year but paid in a later year. Most plans that distribute this type of compensation are limited in use and designed for a very specific purpose. If the plan fails to fully meet provisions of Section 409A, the income should be reported using Box 15b. Income reported in Box 15b should also be reported in Box 7 of this form. The reason for including payments in both boxes is that amounts reported in Box 15b may be subject to additional tax. Appropriate use of Boxes 15a and 15b help payees and the IRS correctly calculate the amount of tax owed. Reporting related to Section 409A can be particularly complex, and the direct assistance of an benefit plan expert is warranted. The standard $600 reporting threshold applies to Box 15a non-qualified deferred compensation. There is no minimum threshold for Form 1099-Misc Box 15b compensation.

1099-Misc Box 16, Box 17, and Box 18: State Reporting

State reporting boxes are provided as a convenience on IRS Form 1099-MISC, and they are considered optional by the IRS. Payees may report payments of up to two states per form. Use Box 16 to report the amount of state tax that was withheld, and, in Box 18, include the amount of the gross payment that is subject to state reporting. The two-letter state abbreviation, and the payer’s state ID number for 1099 state reporting should go in Box 17. If these boxes are used, it’s a good idea to include an additional copy of the form to help the payee in filing their state income tax return.

Additional Resources on Form 1099-MISC Webinar On-Demand: Form 1099-Misc Reporting and Downloadable IRS Form 1099-MISC

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