How to Know When to Issue a 1099-MISC

File a 1099-Misc

A 1099-MISC needs to be issued by your trade or business under many situations when you pay someone for rent, services, royalties or other various fees.

Difficulty:

Moderate

Instructions

Things You'll Need

• Spreadsheet Softwares
• File Cabinets
• Office Software
• Accountants
• Calculators
• Notebook Papers
• Tax Services
• EIN
• Business Services
• IRS Forms

Who Must Issue 1099-MISCs

1. Determine if you have a trade or business. If you are operating for the purpose of making a gain or profit, you have a trade or business.

2. Determine if you run a nonprofit organization, a taxable farmers cooperative, a government agency, or a trust of a qualified pension or profit-sharing employer plan. These are considered trades or businesses for 1099-MISC purposes.

3. Calculate if you paid $600 or more during the tax year in the course of your trade or business to an individual or partnership. Professional fees to an attorney, doctor or other professional are included. Payments to corporations are included only if they are for medical, health care, legal or fishing activities.

4. Calculate if you paid $10 or more in royalties.

5. Issue 1099-MISCs if you have or manage a trade or business and have paid $600 or more to an individual or partnership (or certain corporations) or have paid $10 or more in royalties.

6. Issue a separate 1099-MISC to each individual or partnership (or specific corporation).

Payments Requiring 1099-MISC

1. Determine that you paid $600 or more in compensation for services rendered by a nonemployee to your trade or business. Include the gross amount of payments in box 7, including anything you paid the contractor for supplies and materials.

2. Determine that you paid $600 or more in rent for office space, machines, equipment or land in the course of your trade or business. Write the amount in box 1. Do not include amounts paid to corporations or real estate agents.

3. Verify that your trade or business gave any prizes or awards to an individual who is not your employee. Include only amounts of $600 or more. Put amounts in box 3. But don't report it if the prize was transferred directly to charity.

4. Verify that your trade or business paid $600 or more in medical or health care payments to an individual, partnership or corporation. Put the amount in box 6.

5. Verify that your trade or business paid $600 or more to an attorney or corporation for any legal services. Write the amount in box 7. If you cannot determine the amount paid that applies to legal services, write the gross amount paid, even if less than $600, in box 13 and put the letter A after the amount.

6. Determine if you paid $600 or more in taxable fringe benefits to nonemployees in the course of your trade or business. Write the amount in box 7.

7. Determine if your trade or business paid $600 or more in punitive damages. Write the amount in box 3.

8. Determine if your trade or business paid $600 or more in director's fees. Write the amount in box 7.

9. Determine if your trade or business paid $600 or more to a deceased employee's estate or beneficiary. There are some tricky rules on this one, so be careful and get some help. Write the amount in box 3.

10. Verify that you paid $600 or more for your trade or business to purchase fish from an individual, partnership or corporation. Write the entire purchase cost in box 7.

11. Verify that you paid a share of fishing boat receipts to someone. The rules are quite tricky on fishing boats, so see a tax professional. The amount is written in box 5.

12. Verify that you paid royalties of $10 or more in the course of your trade or business. Write the amount in box 2.

Tips & Warnings

• Do not send a 1099-MISC to someone when you have made a personal payment to him. An independent contractor to whom you have made a personal payment unrelated to your trade or business does not receive a 1099-MISC.

• Do not send a 1099-MISC to an employee. That is what a W-2 is for.

• An independent contractor receives a 1099-MISC only if you pay him in the course of your trade or business.

• A household employee who is not an independent contractor should be issued a W-2 by the employer. The employer must also fill out a Schedule H.

• The general rule is that you do not have to send 1099-MISCs to a corporation. The exceptions to the rule are for medical, health care, legal and attorney, and fishing related payments.

• Landlords are now being required to send 1099-MISCs to payees in order to deduct these expenses. This means, too, that even small sole proprietors are required to send landlords 1099-MISCs in order to deduct office rent.

• If you pay someone as an independent contractor who is, in reality, an employee, you can be liable for penalties. Even worse, you can be liable for some of his taxes! An employee is to be paid using the system of a W-2, which includees withholdings for Social Security and Medicare taxes.