Form 1099-Misc

What is 'Form 1099-Misc'

Form 1099-Misc is a tax form that reports the year-end summary of all non-employee compensation. The 1099-Misc form covers rent, royalties, self-employment and independent contractor income, crop insurance proceeds and several other kinds of miscellaneous income.

Misc is short for Miscellaneous Income.

BREAKING DOWN 'Form 1099-Misc'

Every year, each tax payer in America is required to file a tax return, regardless of the amount of income earned for the tax year. Different forms have been customized for different individuals and households by the Internal Revenue Service (IRS). Tax payers that fall into categories like employed, self-employed, investor (local and foreign), nonresident alien, farmer, fisherman, student, charitable organization, etc. will find that they require one or more tax forms come tax season. One of the tax forms that is frequently filled out and mailed to the IRS annually is Form 1099, which was designed for people who earn income that is not classified as a wage, salary, or tip.

The 1099 form has multiple variants which the IRS refers to as Information Returns. The IRS matches the information provided and reported on these forms (by a lender, broker, investment fund company, government agency, bank, health insurance provider, employer, debt issuer, etc.) to the information provided by the individuals on their individual tax returns. The variants of the 1099 form are used to report income from dividends (1099-DIV), interest payments (1099-INT), traditional IRA withdrawals (1099-R), unemployment compensation (1099-G), real estate transactions (1099-S), etc. One of the most popular versions of the 1099 Form is the 1099-Miscellaneous Income (MISC) which is to be reported by independent contractors, freelancers, sole-proprietors, or self-employed individuals.

Do You Need to File the 1099-MISC?

The ‘Miscellaneous’ term attached to Form 1099 refers to income that cannot precisely be reported on any of the other tax forms provided by the IRS. If you are an independent contractor –  such as a consultant, artist, web developer, or freelance writer – and provide services to other individuals or businesses for a period of time in exchange for a fee, the fee earned is a type of miscellaneous income that you, the freelancer, must pay taxes on. The income is required to be filed to the IRS using the 1099-Misc form. Contract workers will receive multiple 1099-Misc forms if s/he provided services for more than one client.

How Does the 1099-MISC Work?

A business or client who pays a vendor for his or her services, generally must issue form 1099-Misc to the payee by January 31st of the following year and file a copy of the form to the IRS by last day of February (if filing manually) or last day of March (if filing electronically). Since the 1099-Misc is an information return, meaning it’s created for informational purposes only and not attached to income tax forms filed with the state and federal government, only one form should be issued to each contract worker. A client is required to only generate and issue the 1099-Misc if $600 or more was paid to a non-employee over the course of the year. Any amount paid less than $600 does not need to be reported to the IRS. However, a freelancer who earns, say $300, from ten different clients during the year must still report and pay taxes on the income even though s/he will not receive 1099-Misc forms from each of the ten clients.

In addition to using Form 1099-Misc to report payments made to a non-employee as earned income, a client should also use the form to report any payment of at least $10 in royalties and at least $600 for non-services such as rent, attorney fees, medical and health care, prizes and awards to non-employees, fish purchased from a fish vendor, etc.

Before a Form 1099-Misc can be prepared for a vendor, a W-9 form must be requested and gotten from each contractor. In summary, the W-9 form is a record that certifies the non-employee’s name, address, taxpayer identification number (such as a Social Security Number), Foreign Account Tax Compliance Act (FATCA) code, and US citizenship or residency.

Form 1099-Misc has 18 boxes which do not all have to filled, depending on the type of payment that was made to a vendor. The boxes are:

  • Box 1 – Rental payments made to the individual contractor or freelancer
  • Box 2 – Total of any royalties paid above $10
  • Box 3 – Other income payments that do not fit in any other boxes on the form, such as prizes and awards to non-employees
  • Box 4 – Any federal income tax withheld from the contractor’s payment
  • Box 5 – Payments made to a fishing boat contractor
  • Box 6 – Value of medical and healthcare benefits provided to an independent contractor
  • Box 7 – Payments made to contract workers for services provided to the client
  • Box 8 – Payment or reimbursement made to an investor whose shares were lent to a short-seller
  • Box 9 – This box is to be checked only, if $5,000 or more worth of consumer products were sold to a person on a commission-basis for resale purposes
  • Box 10 – An insurance company would fill out this box if it paid $600 or more to farmers
  • Boxes 11 and 12 – Both boxes are blank on the sheet
  • Box 13 – The amount in excess of any parachute payment over the base amount paid to an employee who has left the company
  • Box 14 – $600 or more paid to an attorney for providing legal services
  • Box 15a and 15b – Any contributions made to a section 409A retirement plan.
  • Boxes 16 to 18 – These boxes are only provided for convenience to track state income information and do not need to be completed by the payer. Information for more than one state will need to be entered in another 1099-Misc form.

Following the box categories provided, an independent web designer who provided services to Company Z for $$6,500 over the course of the year will have this amount filled in Box 7 of the 1099-Misc form.

For each 1099-Misc form prepared for a contract worker, the client will have to include information about its business such as business name, address, and Federal Employer ID number. In addition to the payment or proceed amounts that will be entered in one or more of the boxes above, the client must have the payee’s taxpayer identification number (TIN) on the form.