Form 1099-MISC is used to report miscellaneous payments made to nonemployees, such as independent contractors.
If you’re starting to work as an independent contractor or freelancer, you’ve likely heard people refer to Form 1099. A 1099 isn’t just one form, but actually a series of documents (including the 1099-MISC) that reports the various types of income you receive.
For instance, you may receive a 1099-INT to report interest income received from your bank, or a 1099-R showing a distribution from a retirement account. But if you’re an independent contractor, the form you’re most likely to see is the 1099-MISC.
What Is a 1099-MISC?
Form 1099-MISC is used to report miscellaneous payments made to nonemployees, like independent contractors, to the IRS. You’re required to issue a 1099-MISC to someone based on two thresholds:
I. You’ve paid at least $10 in royalties or broker payments, in lieu of dividends or tax-exempt interest
II. You’ve paid at least $600 in services, rents, prizes or awards, and other income payments
You can find the full list of payments that qualify for a 1099-MISC on the IRS website.
1099-MISC vs. W-2
Whether you send a 1099-MISC or a W-2 depends on who you are paying.
A W-2 is issued for employees to report their wages and taxes withheld (like payroll taxes).
A 1099-MISC is for any payments you made to a nonemployee, for example, an independent contractor.
Before you start paying people, make sure to learn the difference between an employee and an independent contractor.
What Do You Do If You Receive a 1099-MISC?
If you received a 1099-MISC form from someone who paid you for work you performed, you must report this income on your tax return.
When you receive a 1099-MISC, you should first check your records to ensure that what is reported on the 1099 form is correct.
A 1099-MISC form gets sent to the IRS to report how much you’ve been paid. If the IRS received the wrong information, that could cause confusion with your tax return.
How you report it depends on the type of business you own.
If you are a sole proprietor or single-member limited liability company (LLC), you’ll report 1099 income on Schedule C, Profit or Loss from Business attached to your individual tax return.
If your business is a partnership, multiple-member LLC, or corporation, your 1099 income is reported on the business tax return.
But remember, you don’t want to double count your income. If you’ve already included this income on your tax return—you may have kept track of income during your bookkeeping—don’t add the 1099-MISC income to your tax return.
What If the Information on Your 1099-MISC Is Wrong?
The IRS uses 1099 forms to make sure the taxes owed are paid. It does this by matching the income reported on your tax return to the 1099 forms received from your clients.
So if you receive a 1099 that you know to be wrong, you’ll need to act quickly to get it corrected.
First, contact the issuer and ask them to issue a corrected 1099. If the issuer doesn’t cooperate, you’ll need to address this on your own return.
Example, say a client paid you $1,000 during the year, but your 1099-MISC shows they paid you $1,500. Report the income correctly but attach an explanation to your tax return that addresses the difference.
Make sure you keep copies of any records to back up the lower number just in case you receive an underreporting notice from the IRS, or your return is flagged for an audit.
What If You Don’t Receive a 1099-MISC?
If a client paid you $600 or more during the year but you didn’t receive a 1099-MISC, you still need to report the income. You are required to report all income, even if it is under the $600 threshold.
Sometimes forms get lost in the mail or are sent to the wrong address. And occasionally, people send 1099s late or don’t even realize they need to issue them.
You could contact the client and ask them for a 1099, but even if they don’t comply, just report your income per your records on your return.
If you were paid by a client or customer through a credit card or third-party payment network, you won’t receive a 1099-MISC from your client. Instead, you should receive a 1099-K from the payment processor if you were paid over $600 by a credit card, or over $20,000 (and had over 200 transactions) from a third-party payment network.
Do You Also Need to Send a 1099-MISC?
If you made payments of $600 or more to any individual or unincorporated business as a small business or self-employed individual, you are likely required to file a 1099-MISC.
Example, say you paid a graphic artist $1,200 to design a logo and website for your business. You would be required to file a 1099-MISC with the IRS by January 31 of the following year.
There are some exceptions, though. You don’t need to send a 1099-MISC for:
Payments made with a credit card or through a third-party network; the payment processor should file a 1099-K
Payments made to a corporation
Payments made to employees—these should be included on a W-2
For a full list of exceptions, refer to the IRS instructions for Form 1099-MISC.
How Do You File a 1099-MISC for Your Contractor?
To issue a 1099-MISC, you must have a valid tax ID number for the recipient. It’s a good idea to get a Form W-9 from each independent contractor or unincorporated business that you hire before issuing any payments.
The W-9 simply ensures that you have the correct name, address and tax ID number to issue a 1099. You do not need to file Form W-9 with the IRS—just keep it for your records.
With the W-9 in hand, you are ready to prepare the 1099. For each 1099 you prepare, you’ll need to include:
Your business name, address and tax ID number
The recipient’s name, address and tax ID number
The total amount paid for the year
Because the 1099-MISC is used to report several different kinds of payments, there are boxes for the various payment types. Payments for services should be reported in Box 7, nonemployee compensation.
Payments to an attorney should be reported in Box 14.
If you think any other categories might apply, check out the instructions for Form 1099-MISC or talk to your tax professional.
REMEMBER: THE 1099-MISC IS A MULTIPART FORM
The IRS is sent Copy A
Your state tax department is sent Copy 1
Copy B and Copy 2 are sent to the recipient
You keep Copy C
All of your Copy As of 1099-MISC forms must be submitted to the IRS along with Form 1096, a transmittal form that totals all of the information from the 1099s.
The complicated part of filing Form 1099 Copy A and Form 1096 is that you cannot simply download and submit a printed version of Copy A from the IRS website.
Instead, you’ll need to obtain a physical Form 1099-MISC, fill out Copy A and mail it to the IRS. You can order the forms for free online and you’ll receive your order by mail, usually within 10 days.
However, it’s typically easier to file Forms 1099 and 1096 electronically.
You can e-file these forms using a third-party services or if you do your payroll with Mac Neal LL, we can e-file these forms for you.
What If You Don’t Send a 1099-MISC?
If you neglect to file 1099s or file late, you could face hefty fines. The penalty for failing to file 1099s can be up to $550 per return.
And since the penalties apply to both the copy filed with the IRS and the copy filed with the payee, you could be fined $1,100 for each 1099-MISC that you should have filed but didn’t.
Form 1099-MISC is an important part of your taxes, both when you receive it and when you’re required to send it.
Pay attention to the 1099-MISC that you receive and check it against your current records to ensure that the IRS information is correct.
And be sure to check the requirements for who has to send form 1099-MISC. If you are required to send a form for anyone that you paid, it’s important to get it in by the deadline. Otherwise, you could face fines.