How to Read a 1099-MISC

A trade or business will send you a 1099-MISC if you are a nonemployee and you received $600 or more in payments for services, rent or other activities or royalties of $10 or more.

Things You'll Need

• Calculators
• File Cabinets
• Tax Services
• Pencils
• File Folders
• Notebook Papers
• Tax Preparation Software

Instructions

Independent Contractors

1. Determine that it is your name that is in the recipient's box. Your address will follow. If your name is not spelled correctly or the address is not correct, it is not crucial.

2. Determine that it is your Social Security number or Tax Identification Number that is in the box for the recipient's identification number. This number is important.

3. Look at box 7 to see how much was paid to you as compensation for services you rendered to the payer. This is only valid for nonemployees. Box 7 is the most common box to be filled out on a 1099-MISC. It is intended for independent contractors. If you are truly an employee - and not a contractor - and were paid with a 1099-MISC, you should complain to the employer and the IRS.

4. Look at box 4 to see if the payer withheld any federal income tax for you. Box 11 will have any state income tax withheld. Except for some special rules, tax withholding is not typical for 1099-MISCs. Tax withholdings may be a sign that you are really an employee and should be paid on a W-2, not a 1099-MISC.

5. Verify that the amount in box 5 is the correct amount paid to you as shares of the proceeds of a fishing boat.

6. Look at box 6 to see how much was paid to you for medical or health care services rendered.

7. See if box 9 is checked. A checked box 9 means that you received $5000 or more in goods for resale (not in a retail establishment). It informs the IRS that you are selling goods on a commission, deposit-commission or buy-sell basis.

8. Verify that the amount in box 10 is the correct amount of crop insurance proceeds an insurance company paid you.

9. Look at box 13 to see how much was paid to you for legal services or as excess golden parachute payments. Box 13 is most commonly used for attorney's fees. However, it is an open box in which any information may be related by the payer regarding the recipient.

Rents, Royalties and Other Income

1. Determine that it is your name that is in the recipient's box. Your address will follow. If your name is not spelled correctly or the address is not correct, it is not crucial.

2. Determine that it is your Social Security number or Tax Identification Number that is in the box for the recipient's identification number. This number is important.

3. Verify that the amount in box 1 is the correct amount paid to you for rent of office space, land, equipment or machinery.

4. Verify that the amount in box 2 is the correct amount of royalties you received from the payer. Royalties are reported to you if they are $10 or more.

5. Look at box 3 to see how much was paid to you for "Other income." This box includes payments to you of prizes, awards or punitive damages. Some unusual payments such as those for terminations or to deceased employees may also be in this box. However, some payers mistakenly put payments in this box when they are confused.

6. Verify that the amount in box 8 is the correct amount that you, as a broker, received for a customer in lieu of dividends or tax-exempt interest. The amount has to be at least $10 to be reported. This is a tricky, technical matter. If you don't understand it, talk to a professional tax person.

7. Look at box 4 to see if the payer withheld any federal income tax for you. Box 11 will have any state income tax withheld.

Tips & Warnings

• If you have been paid as a nonemployee when you are really an employee, you are being treated shabbily and illegally. A contractor must pay 15.3% of his net income in Social Security and Medicare taxes. An employee must only pay 7.65%. Your employer has just taken 7.65% of your income away from you, because he is supposed to pay it instead of you. Go to a tax professional and have him fill out a Form 4137 and write an explanation to the IRS as to why you are really an employee.

• Payments made to you in box 1 will probably require you to fill out Schedule E to report rental income.

• Payments made to you in boxes 5, 6, 7 and 13 are most likely to be considered self-employment income. Box 3 may also include self-employment income. You are required to fill out Schedule C or C-EZ (or Schedule F if you are a farmer) and Schedule SE for self-employment income. You will be subject to self-employment taxes.

• The IRS has received a copy of the 1099-MISC if you have gotten one. Ignoring this income on your tax return will surely result in trouble for you.