Form 1099-MISC

In the United States, Form 1099-MISC is a variant of Form 1099 used to report miscellaneous income. One notable use of Form 1099-MISC is to report amounts paid by a business (including nonprofits[1]:1) to a non-corporate US resident independent contractor for services (in IRS terminology, such payments are nonemployee compensation). The ubiquity of the form has also led to use of the phrase "1099 workers" or "the 1099 economy" to refer to the independent contractors themselves.[2] Other uses of Form 1099-MISC include rental income, royalties, and Indian gaming profits.[3]

The form is issued by the payer (e.g. business) and is due to the recipient (e.g. contractor) by January 31 and to the IRS by February 28 each year for work done during the previous tax year.[4][3] If the payer is registered to file electronically with the IRS the deadline for filing with the IRS is March 31.[5]

Use cases

There are several use cases of Form 1099-MISC. Whether an income is taxable and whether it should be reported on Form 1099-MISC are distinct questions. There may be other forms, such as Form W-2 (for wages) or Form 1099-K (for payments made with a credit card) that must be filed instead.[1]

Business–contractor arrangement

One common use of Form 1099-MISC is to report payments by a business to US resident independent contractors. For the purpose of this form, "business" includes nonprofits and other organizations.[1]:1 In this case Form 1099-MISC needs to be issued only when the total amount paid during the tax year is at least $600, though the Form may still be issued at lower amounts.[3] This is the case even if individual payment amounts are all less than $600. However, since Form 1099-MISC only concerns payments made to an individual as an independent contractor, if an individual becomes an employee later (see below), the $600 threshold need be met only for part of work done as an independent contractor.

In a business–contractor arrangement, the following must apply:

It is possible for a payee to start as a contractor and later become an employee. It is also possible for a payee to maintain two jobs—one as a contractor and the other as an employee—under the same payer. In these cases, the payee can receive both Form 1099-MISC and Form W-2.[6][7]

Other use cases

Other uses of Form 1099-MISC include rental income, royalties, and Indian gaming profits.[3]

Payments made through third-party networks

When payments are made through third-party networks, filing Form 1099-MISC is not required. Instead, Form 1099-K will be filed by the payment service.[8] Nevertheless Form 1099-MISC may still be issued.

Nonresident payee

A major difference exists for personal payments when the payee is a nonresident for tax purposes (including undocumented alien). In this case, Form 1099-MISC should still not be filed, but Form 1042-S (the corresponding form to Form 1099-MISC) must be issued regardless of whether the payer is an organization or a private individual. For instance, if one hires household help, then if the help is a US citizen or resident for tax purposes one need not issue a Form 1099, but if the payee is an undocumented alien one must issue a Form 1042-S.[9]

Significance for payer

Liability

If the payer does not file Form 1099-MISC, there is a maximum penalty of $250 per form not filed, up to $500,000 per year. Otherwise for late filings the penalty varies from $30 to $100, depending on how late the filing was.[4]

Relation with payer's tax filing

There is no precise match between total amount paid from Form 1099-MISCs issued and any line item in the profit/loss report, because of the constraint of not reporting money paid when the amount to an individual is less than $600. However, IRS may get suspicious if the profit/loss report suggests a large amount of money paid to independent contractors but few or no Form 1099-MISCs reported.

Significance for payee

As part of their tax return, independent contractor payees will usually complete a Schedule C (amount from Schedule C will go on line 12 of Form 1040), and Schedule SE (amount from Schedule SE will affect Lines 27 and 57 of Form 1040, and in particular will influence the calculation of Social Security and Medicare taxes).

Payees receiving Form 1099-MISC for rents and royalties usually need to fill Schedule E (amount from this will go to line 17 of Form 1040).[4]

Since the IRS receives Form 1099-MISCs from the payer, if the payee reports a smaller total than the sum of Form 1099-MISCs, the IRS can get suspicious. However, the sum of Form 1099-MISC amounts may not cover all of the payee's income as an independent contractor (due to payers who don't issue the form because of the $600 threshold or because of tax error on the payer's part, and also due to personal payments, which are not reportable on Form 1099-MISC). The payee still has a responsibility to pay taxes for the total amount.

Liability

There is a penalty to the payee for not paying income tax for the income referenced by Form 1099-MISC. The penalty is up to 20% of the underpayment.[4]

Related forms

If a contractor is paid electronically using a service such as PayPal, then the correct form to use is Form 1099-K, which the payment service will furnish. In other words, even if the payer paid more than $600, filing Form 1099-MISC is not required. However, Form 1099-MISC can still be filed, in which case both forms will be sent to the payee, causing the payment to be possibly over-reported if one simply sums the payments reported on each form. In addition, Form 1099-K is only issued when the payment is more than $20,000 and there were more than 200 transactions, in which case payment calculated from the forms may be under-reported. In such cases, it is necessary to track payments separately.[8][10]

Withholding and estimated tax payment

Form 1099 need not be attached to the payee's tax return if no tax was withheld.[11] In general, payer-sent forms are used to substantiate claims of withholding, so only forms that involve withholding need to be attached.

In almost all cases, income associated with Form 1099-MISC is not subject to withholding. However, income from class II or class III gaming as an Indian tribal member must be withheld.[1]:4

Withholding requirements are different for nonresident payees, in which case Form 1042-S is used instead.

Individuals whose income is primarily from Form 1099-MISC therefore need to send estimated tax payments through the Electronic Federal Tax Payment System (EFTPS) or by paper-filing Form 1040-ES with a check.

Even those who don't need to pay income tax may still owe some social security or Medicare taxes.[12] So very low-income individuals who are self-employed may need to file returns whereas comparable individuals who work as an employee (whose income is withheld) may not.

History

In 1918, Form 1099 was created by the Internal Revenue Service for use with the 1917 tax year.[13] At the time, employers were required to use the form to report salaries paid in excess of $800.[13]

See also

References

  1. 1 2 3 4 5 "2016 Instructions for Form 1099-MISC" (PDF). Internal Revenue Service. Retrieved January 19, 2016.
  2. ↑ Forbes, The Rise of The 1099 Economy: More Americans Are Becoming Their Own Bosses, http://www.forbes.com/sites/joelkotkin/2012/07/25/the-rise-of-the-1099-economy-more-americans-are-becoming-their-own-bosses/
  3. 1 2 3 4 "What If I Have to Issue a 1099 Form?". efile.com. Retrieved January 16, 2016.
  4. 1 2 3 4 "Penalties for Not Filing a 1099-Misc IRS Form". 2015. Retrieved January 19, 2016.
  5. ↑ "2016 General Instructions for Certain Information Returns" (PDF). 2016. Retrieved January 20, 2016.
  6. ↑ Zias, Kerry. "How to Give a 1099 and W-2 to the Same Person". Retrieved January 20, 2016.
  7. ↑ Gould, Tim (May 24, 2013). "Workers can be both employees and ICs, IRS rules". Retrieved January 20, 2016.
  8. 1 2 Campbell, Anita (January 26, 2015). "Must You Send 1099 Forms to Contractors Paid Via PayPal or Credit Card?". Retrieved January 20, 2016.
  9. ↑ "Pay for Personal Services Performed". Retrieved January 20, 2016.
  10. ↑ Phillips, Kelly (August 29, 2014). "Credit Cards, The IRS, Form 1099-K And The $19,399 Reporting Hole". Archived from the original on December 14, 2015. Retrieved January 20, 2016.
  11. ↑ Smith, Naomi. "Do You Need to Attach 1099 Forms to a Federal Tax Return?". Retrieved January 1, 2015.
  12. ↑ "How to File Taxes with IRS Form 1099-MISC". 2015. Retrieved January 20, 2016.
  13. 1 2 "$578,304 Decrease in W.R.&E. Surplus: Strike, Higher Tax and Increase in Materials and Labor Cost Cut Net Income." The Washington Post. January 20, 1918. p. RE4. "A special blank for use of employers in reporting to collectors of Internal revenue annual salaries paid in 1917 in excess of $800 has been prepared by the bureau of internal revenue throughout the country. The blank is form 1099, and Washington business organizations can procure it by applying at the Treasury. Under the war revenue act of 1917 employers are no longer required to withhold the 2 per cent income tax from salaries, except in the case of non-resident aliens, but must advise the internal revenue collectors of all salaries paid which amount to $800 or more."
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