In addition to issuing Form W-2 to each employee at the end of the year, every business also has the obligation to issue Form 1099-MISC to certain individuals or businesses. There are over 15 boxes on Form 1099-MISC, but only a few of them are commonly used by small businesses, and this article will summarize just those commonly used boxes.
We've also talked more about the Form 1099-MISC here.
What Payments Should Be Reported on Form 1099-MISC?Form 1099-MISC is primarily used to report to the IRS payments that have been in the course of business during the previous calendar year to individuals or businesses that are not employees. According to the Instructions for Form 1099-MISC, certain payments should not be reported on Form 1099-MISC:
- Payments to employees. (Payments to employee should be reported on Form W-2)
- Most payments to corporations. The exceptions to this rule are listed on page 2 of the Instructions.
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
- Payments that should be reported on other versions of Form 1099.
So what are the most common boxes in which payments are reported?
Box 7: Nonemployee Compensation
This is the box in which the vast majority of payments are reported. The general rule of thumb is that payments that are reported in this box are subject to the self-employment tax. That is why most payments to sole proprietors, partnerships, and limited liability companies are reported in this box, because individuals, partners, and members of an LLC are subject to the self-employment tax.
In order to be reported as nonemployee compensation in Box 7, the instructions state that the following four conditions must be met:
- You made the payment to someone who is not your employee;
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
- You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
- You made payments to the payee of at least $600 during the year.
To assist employers to decide what payments have to be reported in Box 7, page 7 of the instructions provides almost a full page of examples.
Box 1: Rents
Amounts of $600 or more that are paid to rent space for a business are reported in Box 1. However, there is one notable exception. If a business makes its rental payments to a real estate agent instead of directly to a landlord, the payments should not be reported on Form 1099-MISC. It is the obligation of the real estate agent to report the payments that it makes to the landlord.
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Box 3: Other Income
Payments of $600 or more that are made to nonemployees that are not for services performed are reported in Box 3. The IRS states that this box should be used if the other income “is not reportable in one of the other boxes on the form.” Two of the most common uses of this box are to report prizes and awards that are not for services performed, and payments made to the beneficiary or estate of a deceased employee that are paid after the employee's death. (The latter will be the subject of a later article.)
Box 9: Direct SalesBox 9 is unusual because no amounts are reported in the box. It only contains a check box. If a business sells consumer products to an individual that the individual will then resell to someone else other than in a permanent retail establishment, and the total sales are more than $5,000, then the business should issue a Form 1099-MISC with Box 9 checked.
The above is just an overview of the most common uses of Form 1099-MISC. Before completing this form each year, it is important to review the detailed Instructions for Form 1099-MISC.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.