As a business owner, you likely have had to report payments on a 1099-MISC form to one or more of your vendors who provide services for your business. But what are they, and when do you need one?
Simply put, a 1099-MISC form records payments that are not employee wages. If you hire sole proprietors or businesses set up as partnerships, single member LLCs or multi-member LLCs not reporting as an S-Corp or C-Corp to provide services to your business, you most likely need to provide them a 1099-MISC form. This miscellaneous version of the form keeps the information simple for reporting income on a Schedule C or partnership return. The IRS requires this for anyone you pay $600 or more cumulative for the year, who is not incorporated. The only exception to this rule is money paid to an attorney and to health care providers.
Payments to Report on 1099-MISC Form
- Box 1: Rents paid
- Box 3: Prizes and awards and other income
- Box 4: Federal income tax withheld under backup withholding rules
- Box 5: Fishing boat proceeds
- Box 6: Medical and health care payments. Include payments of $600 or more made in the course of your trade or business to each physician or other supplier or provider of medical or health care services. If payment is made to a corporation, list the corporation as the recipient rather than the individual providing the services. You are not required to report payments to pharmacies for prescription drugs.
- Box 7: Services performed by anyone who is not your employee (including parts and materials, and cash payments for fish (or other aquatic life) you purchase from anyone on the business of catching fish
- Box 9: Payer Made Direct Sales of $5,000 or more
- Box 10: Crop insurance proceeds
- Box 14: Gross proceeds to an attorney
Note: The exemption from reporting payments made to corporations does not apply to payments for legal services. Therefore, you must report attorneys’ fees (in box 7) or gross proceeds (in box 14) to corporations that provide legal services.
If you are the person providing services, the onus for reporting income on your tax return lies with you. If you do not receive a 1099-MISC form, you should request one from the entity paying you. And if you see errors on your 1099, it is your responsibility to get it corrected so you file the right amount.
Other common types of 1099s will report additional types of income. For bank account interest earned, use a 1099-INT. For investment dividends and distributions, a 1099-DIV; and for proceeds from real estate transactions, a 1099-S. Distributions from retirement accounts, annuities, or pensions require a 1099-R. And debt cancellation – which is taxed as income – goes on a 1099-C.
Obtaining a W-9 Form
In order to have the information you need to create a 1099, you must request your service provider to complete an IRS form W-9. This form is required by the IRS and will give the legal name, tax ID or social security number, and business structure of the entity you are paying. In addition, the person who completes the form will sign, under penalties of perjury, that the information is correct. 1099s are required to be mailed by January 31 for the prior year, so don’t wait until the last minute to get this needed information from your vendors. Best practices would be to have your vendor complete the W-9 form prior to the first payment you make to them.
If your vendor refuses to give you a W-9 form and/or they give you an ITIN number or an incorrect tax ID number or social security number, you are required by the IRS to implement backup withholding. That means you must remit to the IRS and state a specific percentage of the total payments made. For more info, go to: https://www.irs.gov/pub/irs-pdf/p1281.pdf
Note: An ITIN or an Individual Taxpayer Identification Number is a number issued by the IRS for income tax reporting only, The ITIN is a nine digit number and always begins with the number 9 and has a 7 or 8 in the fourth digit, such as 9XX-7X-XXXX. ITINs are not the same as a social security number. You can verify if a social security number is correct for payroll reporting purposes on the Social Security Administration’s website (https://www.ssa.gov/employer/ssnv.htm)
Why is it Important?
How important is it to file 1099s? As a business owner, you will send a copy of the 1099 form along with a cover form 1096 to the IRS and a copy to your state’s revenue office (with an NC-3 form in NC) for anyone you have paid. One exception to this rule are payments made with a credit card or payment card and certain other types of payments, including third-party network transactions and PayPal. These payments will be reported on Form 1099-K by the payment settlement entity and are not subject to reporting on Form 1099-MISC.
Businesses which have paid your business and send you a 1099 are also sending a copy to the IRS and state. Thus, failing to report the income on the 1099 you receive could alert the IRS to flagging your tax return for an audit.
For more info, go to: https://www.irs.gov/instructions/i1099msc#idm139665634535968
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