Filing Form 1099-MISC: What You Need to Know

Businesses have a mountain of paperwork to file when preparing their taxes. While employee tax obligations are relatively straightforward, what if you work with freelancers and independent contractors? Self-employed individuals aren't full-time staff employees, so they're exempt from income tax withholding. Because you're not their official employer, you don't have to pay for Medicare and the Social Security Administration taxes. Contractors take care of that with self-employment taxes.

But just because your company doesn't withhold taxes or provide employee benefits doesn't mean that you're in the clear as far as tax reporting goes. Companies must still report the compensation to self-employed gig workers, affiliates, royalty owners and more.

That's where IRS Form 1099-MISC comes in. This form is not like others you prepare for employees. It's specifically for reporting miscellaneous payments and any payouts you send above a certain threshold. Failing to file this document may lead to a world of headaches and intense scrutiny from the Internal Revenue Service (IRS).

So, what is the Form 1099-MISC, and how do you file it? Here at Dots, we know how confusing it can be to navigate taxes when working with self-employed individuals. In this guide, we'll teach you how to file Form 1099-MISC and review your company's and contractors' responsibilities.

What is it?

Form 1099-MISC is one of many IRS tax forms under the 1099 umbrella. All 1099 forms help prepare and file an information return, allowing taxpayers to report different types of income outside wages and salaries. This specific document revolves around reporting miscellaneous income. As a business, you would file Form 1099 to report payments made to contractors during their work during a tax year. You must file it early in the calendar year to give self-employed contractors plenty of time to fulfill their tax obligations.

Miscellaneous income can include many different things. As a good rule of thumb, it applies to any payments you make to entities that aren't employees or vendors. For example, the salaries you pay staff employees and the supplies you purchase from vendors fall under operating expenses. But when you pay others for contract work, it's considered a nonemployee income payment.

This form is also applicable to other payouts. You'd need to file Form 1099-MISC if you send prizes, awards, rents, royalties, etc. Many consider this form a "catch-all" for any income that doesn't squarely fall as an operating or business expense. For most companies, that includes contractors and sole proprietor small businesses you hire to perform a service.

Who Receives One?

There is some confusion about the roles payers (your business) and payees (your contractors) play.

If your company sends payouts to freelancers, gig workers and other recipients, you must file a 1099-MISC. That responsibility falls upon the entity that sends payments. You must file a 1099-MISC for every contractor you work with throughout the tax year. Whether that's only a handful or several thousand, every self-employed person you pay gets a 1099-MISC.

There are two parts to this form. Copy A goes directly to the IRS. Meanwhile, Copy B goes to the contractor directly. We'll review the deadlines in a bit, but you must remember to send Copy B in the calendar year to ensure contractors receive their 1099-MISC for tax-filing purposes.

Not every payout situation requires you to file Form 1099-MISC. There are a few conditions you must meet.

For contractors, the threshold is $600. You must file a 1099-MISC for every contractor you send $600 or more during the tax year. That same $600 threshold exists if you send money for:

  • Rents
  • Prizes or rewards
  • Payments to an attorney
  • Health care payments
  • Nonqualified deferred compensation
  • Section 409A deferrals
  • Crop insurance proceeds
  • Fishing boat proceeds
  • Cash payments for fish
  • Intellectual property royalties
  • Payments from a notional principal contract
  • Class-action lawsuit settlements

Some of those items have boxes on the 1099-MISC form. However, others can fit into the "Other Income" box.

In addition to the $600 threshold for the examples above, you must file a 1099-MISC when you pay a minimum of only $10 in royalties or broker payments in place of tax-exempt interest or dividends.

Finally, filing a 1099-MISC is necessary if you made at least $5,000 in direct sales of consumer products to a buyer for resale if those sales occurred anywhere other than a retail establishment.

What Information Needs to be Reported?

Every 1099-MISC form you file requires specific details. Filing out this form can be a labor-intensive task. However, modern payout platforms like Dots can handle the heavy lifting. The Dots API can generate 1099-MISC forms in minutes as long as you have the necessary information.

So what do you have to include in the 1099-MISC form? Three separate sections cover different pieces of tax information. They include details about your business, information about the contractors and payment recipients and data about the payments you send.

For the first section, you must provide payer information. The payer is your business, and the form asks for your business name, street address, city, state, country, ZIP code and telephone number. A complete document will also include your company's Taxpayer Identification Number (TIN).

The next section covers the contractor's details. It'll ask for the self-employed individual's TIN. You can also provide the recipient's Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN). You must also provide the recipient's name and residential address. If you work with many gig workers or contractors, you can include the account number you use internally to organize payments.

The final section includes multiple boxes covering different types of payments you made. You don't have to input information for every box. Instead, you only report the various payments you made to the individual. Here's a quick breakdown of what each box is for.

  • Box 1: Rents. Rents include real-estate rentals for office space, machine rentals, pasture rentals, etc.
  • Box 2: Royalties. Here's where you report royalties of $10 or more for oil, gas, mineral rights, intellectual property, patents, trademarks, etc.
  • Box 3: Other Income. This box is to report any other miscellaneous payments that don't fit into the other reportable boxes.
  • Box 4: Federal Income Tax Withheld. If you have any backup withholding, you'd report it here. Typically, contractors who don't provide a TIN are subject to withholding for any payments related to boxes 1, 2, 3, 5, 6, 8, 9 and 10.
  • Box 5: Fishing Boat Proceeds. Boat operators use this box to report payments made to cover the share of catch proceeds.
  • Box 6: Medical and Health care Payments. This box reports payments you made to a physician or health care provider.
  • Box 7: Payer Made Direct Sales Totaling $5,000 or More. As of 2020, box 7 is to report that you directly sold consumer goods over $5,000 for resale outside a retail establishment. Instead of providing an exact dollar amount, you enter an "X."
  • Box 8: Substitute Payments in Lieu of Dividends or Interest. This box is for reporting payments of at least $10 that substitute dividends or tax-exempt interest.
  • Box 9: Crop Insurance Proceeds. Farmers who receive more than $600 in insurance proceeds must report the figure here.
  • Box 10: Gross Proceeds Paid to an Attorney. This box is to report payments made to an attorney for legal services.
  • Box 11: Fish Purchased for Resale. This box is to report cash payments of more than $600 to any person or entity that catches fish.
  • Box 12: Section 409A Deferrals. Deferrals of at least $600 for nonemployees under nonqualified plans go here.
  • Box 13: FACTA Filing Requirement Checkbox. This is another non-numeric box. You'd check if the payer reports on Form 1099-MISC to satisfy Chapter 4 accounting reporting requirements.
  • Box 14: Excess Golden Parachute Payments. This box is to report parachute payments over the base amount.
  • Box 15: Nonqualified Deferred Compensation. Here is where you report all amounts deferred that are not eligible for inclusion in income under 409A.
  • Box 16: State Tax Withheld. If you participate in a combined federal and state filing program, you would report withheld state taxes here.
  • Box 17: State/Payer's State No. Input the state abbreviation and your company's state identification number.
  • Box 18: State Income. This box is for reporting state income payments.

Deadlines to be Aware of

There are a few different deadlines you must pay attention to when filing your 1099-MISC forms.

The one that comes first is the recipient copy. You must send those out to every contractor you pay by January 31st of the year following the tax period. There is one exception. If you only report payments in boxes 8 and 10, you have until February 15th.

You have a few deadlines for Copy A that goes to the IRS. If you're filing electronically, you have until March 31st. For companies that file via paper, the deadline is February 28th.

Like all tax filing duties, getting these forms out as early as possible is always a good idea. Your recipients can't calculate their taxes without Form 1099-MISC. That's why the deadline is so early. Preparing these documents as soon as possible will benefit you and your contractors.

1099-MISC vs 1099-NEC

Until 2020, all companies used Form 1099-MISC to report compensation paid to nonemployees. However, things have changed in recent years.

In the past, the 1099-MISC had a dedicated box (box 7) for reporting nonemployee compensation to independent contractors. However, varying deadlines for this versus the rest of the 1099-MISC form created tons of confusion. The IRS addressed that headache by spinning that box into a separate document, Form 1099-NEC.

The IRS drafted Form 1099-NEC specifically for reporting nonemployee compensation. You'd use it when you pay someone who's not a direct staff employee of your business for services that benefit your company. It mostly applies to self-employed contractors but also includes payments to partnerships, estates and even corporations. Like the 1099-MISC, you must report all nonemployee compensation of $600 or more and file a separate form for all recipients.

Contrary to popular belief, 1099-NEC didn't outright replace 1099-MISC. The 1099-MISC form is still relevant for many businesses. The difference is that 1099-NEC is specifically for nonemployee compensation. As a result, companies that primarily pay gig workers and freelancers shifted to this new form after its introduction.

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