Understanding the basics
To report the income of individuals (other than their regular salary), the IRS have set guidelines to fill Form 1099 in the US. However, the 1099 forms are not filled by the individuals, but the entities which pay them.
So, if you are the entity who has availed the services from someone and paid them an amount that surpasses the threshold limit, then you must issue a Form 1099 to them. Form 1099 is, thus, an information form that reports the income of individuals and entities providing services.
Some general points to be considered while filing Form 1099
Form 1099 can be issued to any individual (not corporation); whether a US citizen or an alien resident who is receiving income other than the fixed salary. However, there are a few conditions except the threshold limit which make it easier to clarify who should be receiving the form.
- Someone who is not your employee
- Someone who received the payments in lieu of your business or trade services
- Someone who is either an individual, partnership firm, LLC, sole proprietor or real estate service provider
There are various types of Form 1099. However, in this article, we will be focusing on Form 1099-MISC (Miscellaneous Income) and Form 1099-NEC (Non-employee Compensation).
Form 1099-MISC: When to file and exceptions to consider
Form 1099-MISC can be issued to any individual or non-incorporated entity that falls under the category of partnerships, LLC, and sole proprietorship. It is filed when the recipient has provided services within the business course and the payment received a specified limit.
- It could be royalties of at least $10 which is filled in the box 2 of the form. It also includes the broker payments made in lieu of dividends as well as the tax-exempt interest which needs to be filled in box 8.
- The threshold limit for filing Form 1099-MISC also includes the payment of $600 against miscellaneous compensations made to the recipients. These miscellaneous payments include:
- Rents (which need to be filled in box 1)
- Awards and Prizes (which need to be filled in box 3)
- Other miscellaneous income payments (also reported in box 3)
- Cash paid from a notional principal contract (this too reported in box 3)
- Withholding of Federal Income Tax (reported in box 4)
- Proceedings from fishing boat (filled in box 5)
- Payments made for medical and health care services (filled in box 6)
- Proceedings for crop insurances (comes in box 9)
- Gross proceedings made to attorneys excluding the fees (comes in box 10)
- Deferrals mentioned under Section 409A (comes in box 12)
- Nonqualified deferred compensation (comes in box 15)
Exceptions to be considered while filing Form 1099-MISC
Other than understanding the payments that need to be reported in Form 1099-MISC, one must also be aware about the payments that are not included in this form. These exceptions include:
- Personal payments which are not related to the business or trade (not applicable for NPOs)
- Fees paid to Attorneys such as for settlement (as it is reported in Form 1099-NEC)
- Payments to corporations (until they are of legal)
Form 1099-NEC: When to file and exceptions to consider
If you are paying an individual or entity an amount that equals to $600 or more, and that individual is not your employee, then you must file Form 1099-NEC. It is also issued in case of withheld Federal Income Tax from the payment that needs to be made to a non-employee. These non-employees are also known as freelancers or contractors, and can be individuals or service outsourcing firms.
The threshold limit of Form 1099-MISC and Form 1099-NEC are same but the dates of filing vary. Form 1099-NEC must be filed by January 31 for both offline and online cases. As for Form 1099-MISC, the deadline to file offline forms is February 28, and for online forms, it is March 31.
Payments to be considered while filing Form 1099-NEC
Just like Form 1099-MISC, Form 1099-NEC also has some reservations and exceptions. It is important to understand them as well. One must file Form 1099-NEC only in the following cases:
- When the compensation is paid to non-employed sales people.
- When the payments include fees paid for professional services such as to attorneys, accountants, lawyers, and so on (either to individuals or corporations).
- When one professional pays another professional. This includes splitting of fees or paying referral fees.
- Payments made in legal adjudication like when attorneys pay to witnesses or experts.
- When payments are made against services or parts which were used to perform services.
As for the exceptions:
- Form 1099-NEC is not filed if payments are made against goods, it only includes payments against services.
- Self-employed individuals paying themselves during the course of business, for any reasons, should not be included in the form too.
- Payments made to C-Corp or S-Corp are not included in Form 1099-NEC, until they are made against medical or healthcare services.
- Payments made via third-party payment processors are not included in the form too as they are filled in Form 1099-K
Some seeing-off tips…
It is important that all the payments are filled in the right boxes of the form; otherwise the IRS can disregard the entire form. Moreover, the penalties of late filing can be huge for your business and you must avoid them at all costs.
Written by – Priyanka Rampal
Follow us for more good reads and helpful insights if you have queries related to finance management and tax filing!