The 1099-MISC is used to report miscellaneous income and has long been the most common form provided to independent contractors.
Box 6 on the 1099-MISC has always been difficult to understand for taxpayers in a variety of situations. Fortunately, there are some simple tips that make it much easier to understand when it should and should not be used based upon guidance from the IRS.
What to do if you receive a 1099-MISC with Box 6 information
Just like any other 1099 you receive, it will need to be reported to the IRS as taxable income. The type of entity you are will determine how it is reported. It is essential to always report all of your 1099 forms when completing your tax return to ensure backup withholding is not an issue. Backup withholding is when the taxpayer is required to withhold at a rate of 24% to ensure the IRS receives the taxes on income by the required due date.
If you are an individual (for income tax purposes this includes any type of pass-through entity) it will ultimately land on your Schedule C when completing your tax return which means you will also be able to deduct any related business expenses. The same is true for small business owners.
Keep in mind that if you receive a 1099 then the entity or person you provided services to did not withhold any taxes. In order to withhold taxes, they would have required you to fill out a Form W-9As a result, you will use Schedule SE to calculate what you owe for the self-employment tax. You likely will also be responsible for state income tax payments as well. Unlike Federal tax payments, there are a wide range of state tax requirements which is particularly important if you are providing goods and/or services across multiple states.
If you are a corporation it will be reported the same way as all income sources are reported.
Medical situations receiving special treatment
Medical payment reimbursement applies when an individual pays for something, you – as the agency, receives Medicare or Medicaid payments, and then reimburse the individual. This type of payment is reportable on the 1099-MISC Box 6. While it is reportable it is not actually a taxable event for the individual which is beneficial since many people using Medicare or Medicaid will be on some form of social security assistance.
Renting or leasing medical equipment
Assuming it is not being leased for resale, any payments made to cover renting or leasing large medical items is not reportable in Box 6. Large medical items include items like hospital beds or shower chairs. Renting or leasing items would be reported in Box 1. This is particularly important because C and S corporations are exempt from receiving a Box 1 1099-Misc.
Any payments made to a medical expert do not fall within the definition of “Persons Providing Health Care Services”. Instead, it is considered an “Expert Witness Fee” which is reported under Box 7 as legal services. Similar to renting or leasing medical equipment, C and S corporations are exempt from Box 7 reporting requirements. Individual doctors are not exempt.
Should you be concerned with Form 1099-NEC?
Since 2020, the IRS has been using 1099-NEC to report freelance earnigns. This form is used to make the distinction between nonemployee compensation and other types of payments a business makes. As a result, non-employees will receive a 1099-NEC instead of the 1099-MISC. As with all IRS forms, it can be located on the IRS.gov website.
When does a company provide a 1099-MISC with information in Box 6?
In general, you should provide a Form 1099-MISC with information in Box 6 anytime all of the following conditions are met.
- As the payer, you made payments over the course of a year totaling $600 to a payee
- The payments were made during the course of your trade or business
- The payments were made to a physician or other supplier of medical or health care services
It is important to include payments made by medical and health care insurers under health, accident, and sickness insurance programs when you are determining who met the $600 threshold and who you need to provide a 1099-MISC to. Be careful not to include insurance premium payments. Premiums are not considered a service because it is a payment for insurance that may or may not be used.
If you are a medical or health care insurance company, any payments made under a health, sickness, and accident program are reportable.
What does “persons providing health care services” actually mean?
Persons providing health care services typically include charges for injections, drugs, dentures, and similar items. This includes doctors, nurses, hospitals, and corporations. If the payment is for both goods and medical services then the total amount is included. For example, service would be the time spent with a doctor or nurse and the good would be a pharmaceutical product such as a vaccine.
The corporation exemption does not apply to Box 6
Most of the time you will not provide a Form 1099 to a corporation, but Box 6 payments are an exception to the general rule. If the payment is made to a corporation, you will list the corporation as a recipient of the business income payment rather than an individual's identification number. This is true for both C and S corporations. Box 6 is one of the few 1099-MISC boxes which applies to all business types ranging from large corporations to small sole proprietors and independent contractors.
When do you not need to report payments in Box 6?
There are a few situations that seem like a 1099 would be required but it is not.
Payments to pharmacies
While drugs are included in the list provided by the IRS of health care services you do need to provide a 1099-MISC to any pharmacies for the purchase of prescription drugs. Pharmacies operate in a retail environment, just like any other store, and are not considered healthcare service providers. As a retail provider they have different federal income tax guidelines to follow.
Payments to hospitals and extended care facilities
You are not required to report health care payments made to any of the following:
- Tax-exempt hospital
- Tax-exempt extended care facility
- Hospital owned and operated by any level of government (Federal, State, or Local)
- Extended care facility owned and operated by any level of government (Federal, State, or Local)
Flexible Spending Arrangement (FSA) payments and health reimbursement arrangements
If you make a payment using funds from a Flexible Spending Arrangement (FSA) account or health reimbursement arrangement a 1099-MISC does not need to be provided.
An FSA is a pre-tax account which means you do not pay taxes on the money deferred into the account. There is an annual limit on how much can be put into these accounts and the funds must generally be used during the plan year. Any payments made from an FSA account should not be included in any Box 6 calculations.
Health reimbursement arrangements treated as employer-provided coverage under Section 106 also do not need to be reported. While these types of arrangements can vary the basic description is these are plans which allow the value of the self-insured plan to be tax-free to employees. For an employer, the reimbursements are tax-deductible as a business expense. For the employee, the reimbursements are not included as income, so they are not subject to income or payroll tax withholding.
Does 1099-NEC apply to medical payments?
In general, it is clear the 1099-NEC will not apply to most situations, but it is worth taking a closer look at situations when the traditional 1099-MISC would have been provided to a health care provider who would also typically receive the 1099-MISC
A non-employee is anyone who works for you but is still considered to be self-employed which is a category some health care providers fall into. Fortunately, the IRS has provided very simple guidelines to follow.
This includes allowing all filers of this form to truncate a recipient’s TIN (social security number (SSN), individual taxpayer identification number, or employer identification number (EIN) on payee statements.
The 1099-MISC is still to be used for all non-Box 7 reporting. Since these medical payments are reported under Box 6, the 1099-NEC does not apply. For more information, visit www.irs.gov.
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