Who Needs A 1099?
It seems like there is an endless list of IRS tax forms all with a jumble of letters and numbers. Most of us are familiar with Form W-2 that report your annual wages and Form 1040 used to complete your personal tax return.
Many people wonder if they should receive a 1099 for the work they complete as an independent contractor.
The IRS requires these information returns to attempt to prevent taxpayers from failing to report certain types of miscellaneous income. Since the IRS receives copies of all 1099s issued, it will know if a 1099 form is missing and if you failed to declare some of your income. That could lead to hefty penalties or even an audit in the United States.
Not All 1099s Are Equal
There are numerous IRS Form 1099s. The most common are:
- Form 1099-A: used by a lender who acquires an interest in property to satisfy all or part of the debt. Also used for property known to be abandoned by the borrower
- Form 1099-C: used by financial entities that cancel $600 or more of a debtor’s debt
- Form 1099-DIV: used by banks and financial institutions to report dividends and distributions
- Form 1099-G: used to report taxable governmental payments
- Form 1099-INT: used by a business that pays interest
- Form 1099-K: used by credit card processors and third-party payment networks (e.g. Paypal) to report payment transactions
- Form 1099-MISC: used by a business who pays for certain goods and services
- Form 1099-NEC: used by a business who pays non-employee compensation
- Form 1099-Q: used to report payments from Section 529 and 530 tuition plans
- Form 1099-R: used to report distributions from retirement plans and insurance contracts
- Form 1099-S: used to report sale or exchanges of real estate
Fortunately, most taxpayers only have to think about receiving a few of these forms.
For the sake of time, we’ll focus on Form 1099-MISC and Form 1099-NEC. Freelancers and Small business owners use form 1099-MISC and Form 1099-NEC the most each tax year.
Form 1099-NEC is a new reportable IRS form for tax year 2020. NEC stands for non-employee compensation and this type of income was previously reported in box 7 when you file Form 1099-MISC. The IRS decided that this type of compensation was so frequent that it needed its own form.
Who Receives a Form 1099-NEC
The short answer is anyone who received more than $600 in a year. But of course, it’s not that simple. It also depends on what the payment was for and who the payment was to.
Form 1099-NEC is required for payments made in business dealings. Only business owners need to issue 1099s. Personal payments don’t qualify.
Also, a 1099-NEC is required to be given to all non-employees that are non-corporate entities. So for tax purposes, if a business is classified as a:
- Sole proprietor
- Limited liability company (there’s an exception for an LLC choosing to be taxed as an S-corporation or a C-Corporation. In this case, a 1099-NEC is not required)
and receives at least $600 a year for services completed in the course of business, a Form 1099-NEC is required.
Employees who are paid a formal salary, as well as business travel payments to employees, do not receive 1099 forms.
Special Note About Attorneys and 1099s
If you pay an attorney $600 or more in a year, a 1099 is required, regardless of the attorney’s tax classification. Whether they receive a 1099-MISC or 1099-NEC depends on the nature of the payment.
If you paid an attorney for legal fees to provide you with legal advice or legal services, a Form 1099-NEC is required.
If you paid an attorney gross proceeds (e.g. money to settle a legal matter), then a Form 1099-MISC is required.
Form 1099-MISC is used to report numerous types of payments made to non-employees in the course of business.
There are varying thresholds for when to issue a form but the tax classification requirements are the same as the Form 1099-NEC.
We’ll dissect the Form 1099-MISC to take the mystery away so you’ll know precisely when it’s required.
Box 1 - Rents
When a business pays $600 or more in rent for office space, warehouse, storage, or machinery, it will be reported in Box 1 on Form 1099-MISC.
However, there is an exemption. If rent was paid to a property manager or a real estate agent, they are responsible for issuing a 1099-MISC for rent to the property owner. The tenant is not responsible for issuing the 1099-MISC.
Box 2 - Royalties
The reporting threshold for royalties is $10 or more and is reported in Box 2. These royalties can be from oil and gas mining, the use of patents, copyrights, and trademarks, or sales of books paid to an author.
Box 3 - Other Income
This is a broad catch-all for types of payments of $600 or more that don’t fit anywhere else. Examples of these payments are:
- Prizes or awards received that are not from performing services. Things like gameshow prizes or sweepstakes winnings that don’t involve wagering money in order to win.
- Payments made to a deceased employee for things like accrued vacation or sick leave
- Payments for participating in medical research studies
- Termination payments to former self-employed insurance salespeople
- Most damages received from injuries or illnesses
Box 4 - Federal Income Tax Withheld
Only if a notice from the IRS or court is issued requiring tax to be withheld on payments to certain taxpayers will Box 4 be used.
This is called a backup withholding and only happens when a taxpayer has not reported all income to the IRS or hasn’t provided a correct tax identification number to the IRS.
Box 5 - Fishing Boat Proceeds
When a fishing boat crew member is paid for the sale of their catch or receives a distribution in lieu of cash payment, it’s reported in Box 5.
Box 6 - Medical and Health Care Payments
Payments of $600 or more paid in the course of business to doctors or other health care service providers are reported in Box 6. This is most commonly used for health insurance companies that pay medical providers.
Box 7 - Payer Made Direct Sales of $5,000 or More
If a business sells $5,000 or more of consumer products for resale, a checkmark is placed in Box 7. There should be no dollar amount reported.
Box 8 - Substitute Payments in Lieu of Dividends or Interest
If $10 or more is received in a substitute method from the expected cash dividend or interest payment for loaned securities, Box 8 is used.
Box 9 - Crop Insurance Proceeds
When a farmer receives $600 in insurance proceeds from crop insurance, Box 9 is completed.
Box 10 - Gross Proceeds Paid to an Attorney
When $600 or more is paid to an attorney for legal fees, not in connection with providing legal advice, Box 10 is used. This is most common when a company pays settlement money to an attorney to settle a lawsuit.
Box 11 - Blank
This box is left blank
Box 12 - Section 409A Deferrals
Any amount of $600 or more deferred for a non-employee to a deferred compensation plan is reported in Box 12.
Box 13 - Excess Golden Parachute Payments
Any payment in excess of the base amount allowed under a golden parachute agreement is reported in Box 13.
Box 14 - Nonqualified Deferred Compensation
Similar to Box 12, if deferred compensation is made to a non-employee but fails certain requirements to qualify as a 409A plan, it is reported in Box 14.
Boxes 15 - 17 - State Information
These boxes are used to report any state income tax withheld from any of the payments reported above.
A Word About Form W-9
Form W-9 and 1099s go hand in hand.
The Form W-9 is the form given by the payee that provides their name, address, taxpayer identification number (either an EIN or Social Security number in the case of a sole proprietor), and tax classification.
Most companies will request a Form W-9 before they will issue payment. But it's good practice to send the W-9 along with the first invoice if you expect to receive $600 or more in a year.
A Quick Note About Form 1099-G
When income is received from a governmental entity for things like unemployment insurance or state tax refunds, a Form 1099-G will be issued.