By now, you probably have a stack of tax forms from employers, banks, stockbrokers, lenders, and more on your desk – or more likely, the kitchen counter. For some of you, those tax forms will end up in the hands of your tax professional; the rest of you will input the information on those forms, box for box, into tax preparation software – maybe with a little swearing along the way. No matter how you plan to do your taxes this year, you likely don’t know what all of the numbers, letters, and other information on those forms mean. That’s about to change. This is the fourth in a series of posts meant to help you make sense of all of those forms.
Here’s what you should know about the form 1099-MISC, Miscellaneous Income:
A form 1099, Miscellaneous Income, is a “catch-all” form. It’s used to report income that can’t be neatly categorized anywhere else.
A form 1099-MISC is issued for payments made in the course of a trade or business. Personal payments – for personal services like mowing the lawn at your home – are not reportable. This doesn’t mean, however, that these services are not considered income and therefore, taxable (they likely are). It just means that it’s not the payer’s responsibility to report them.
It’s also not the payer’s responsibility to issue a form 1099-MISC for payments generally made to a corporation, including a limited liability company (LLC) that is treated, for tax purposes, as a C or S Corporation; payments for merchandise, telephone, freight, storage, and similar items; payments of rent to real estate agents; wages and other payments paid to employees (those are reportable on a form W-2); compensation for injuries or sickness by the Department of Justice as a public safety officer disability or survivor’s benefit, or certain benefits under a state program for surviving dependents of a public safety officer; and compensation for wrongful incarceration under federal or state law. Fees paid to informers as well as scholarship or fellowship grants are not reportable on a form 1099-MISC. And, of course, payments that belong somewhere else, such as on a form 1099-K, 1099-C, or other tax form are not reportable on a form 1099-MISC.
In addition to specific criteria for issuing a form 1099-MISC (outlined below), a form 1099-MISC should be issued if any federal income tax was withheld under the backup withholding rules regardless of the amount of the payment.
The form 1099-MISC typically looks like this:
The payer’s identifying information is reported on the top left side of form 1099 while your identifying information is reported on the lower left side of the form. This includes your name and your address. Your Social Security Number may also be on the form – or just the last few digits. The first digits of the number may be redacted for your privacy (this is a relatively new development for certain forms); no matter what your copy indicates, the lender will report your entire Social Security Number on the Copy A provided to IRS.
Relatively new Tax Regulations also require certain payers to satisfy certain Foreign Account Tax Compliance Act (FATCA) reporting requirements by ticking a box on the left side of the form 1099. If you see a tick in the FATCA box (as indicated on the sample form with a blue arrow), you may have a FATCA reporting requirement. Don’t ignore this box. FATCA requirements can be quite onerous and if you skip reporting, you can get hit with serious penalties – including criminal charges.
If you were paid rents totaling over $600 during the tax year, that amount will be reported in box 1. This includes rents for machine rentals and coin-operated amusements.
If you received gross royalty payments (or similar amounts) totaling over $10 during the tax year, that amount will be reported in box 2. That includes royalties from oil, gas, or other mineral properties (but not surface royalties, reported in box 1, nor oil or gas payments for a working interest, reported in box 7; it also doesn’t include timber royalties made under a pay-as-cut contract which are reportable on a separate form). Box 2 royalty payments should also include payments from intangible property such as patents, copyrights, trade names, and trademarks.
If you were fortunate enough to win the Powerball, you might see the proceeds reported at box 3. Prizes, awards, taxable damages, Indian gaming profits, or other taxable income over $600 may be reported here. Also reported in box 3? Payments received as the beneficiary of a deceased employee; I know, it doesn’t seem to fit but box 3 is an odd box used to report income that isn’t reportable in any other box or form. Generally, proceeds in this box will be reported on your 1040 at line 21, the good old “other income” line. If, however, it’s related to a trade or a business, report on Schedule C or F.
Any federal income tax withheld will be reported in box 4. Typically, this is backup withholding attributable to those who did not furnish their tax identification number (TIN) when asked (or those that fell under another backup withholding requirement).
I’ve never actually seen fishing boat proceeds reported on a form 1099-MISC but if you have them, you’ll see them at box 5. Box 5 will include your share of the proceeds from the sale of a catch or the FMV of a distribution in kind to fishing boats with normally fewer than 10 crew members. In addition, any cash payments of up to $100 per trip contingent on a minimum catch paid solely for additional duties are reportable at box 5. However, wages are still reportable on a form W-2 and not here.
If you received payments of $600 or more as a physician or other supplier or provider of medical or health care services, you’ll see those amounts reported in box 6. Note that these are only payments paid out in the course of trade or business (not, for example, for personal visits) and would include payments made by medical and health care insurers under health, accident, and sickness insurance programs. However, payments made under a flexible spending arrangement (FSA) or a health reimbursement arrangement (HRA) may be exempt from reporting requirements. As with attorney fees (see below), the exemption from issuing a form 1099-MISC to a corporation does not apply to payments for medical or health care services provided by corporations, including professional corporations.
Box 7 likely commands the most attention from taxpayers. Box 7 is used to report non-employee compensation totaling over $600. We tend to think of non-employee compensation simply as freelance pay but it also includes fees, commissions, prizes, and awards for services performed as a non-employee (assuming that the services are not paid to a corporation). It also includes other forms of compensation for services performed in the course of trade or business by someone who is not your employee, and fish purchases for cash (yes, fish purchases for cash). As noted above, you’d also see oil and gas payments for a working interest reported in box 7. If you’re engaged in a trade or business, you’ll report these payments on a Schedule C and they will be subject to self-employment tax (if it’s payment for a hobby or non-business purpose, it’s likely reportable on line 21 and not subject to self-employment tax). You’ll also see professional service fees, such as fees to accountants and contractors reported here, as well as fee-splitting and referral arrangements, certain commissions, bartering fees, and taxable fringe benefits. Nonqualified deferred compensation which is includible in gross income because the nonqualified deferred compensation (NQDC) plan fails to satisfy the requirements of section 409A will also be reportable at box 7; that includes so-called golden parachute payments.
Less common are amounts in the next four boxes with text:
- Substitute Payments in Lieu of Dividends or Interest are reportable in box 8. This includes aggregate payments of at least $10 received by a broker for a customer in lieu of dividends or tax-exempt interest as a result of a loan of a customer’s securities.
- You won’t see a dollar amount in box 9. You will, however, see the checkbox ticked if you received $5,000 or more of consumer products as part of a buy-sell, deposit-commission, or other commission basis for resale.
- If you’re a farmer that received crop insurance proceeds of $600 or more paid by an insurance company you’ll see that reported in box 10.
- Any excess golden parachute payments subject to the 20% excise tax will be reported in box 13.
Boxes 11 and 12 will remain blank.
Gross proceeds totaling $600 or more paid to an attorney are reported in box 14. This is true even if the attorney is a corporation and even if legal services are not provided to the payer. It doesn’t matter if the attorney is the exclusive payee (for example, if the names of the attorney and client are on one settlement check) or if money may be payable out of the gross proceeds to a client or other third party. If this is the case, you’ll want to annotate or otherwise provide an explanation for reporting a different amount on your tax return.
Box 15a and box 15b tend to be empty as reporting for 409A (nonqualified plans) may be reportable on other tax forms. If there is an amount reported in box 15b, it should have also been included in box 7.
State tax information for up to two states is reported in boxes 16 through 18. This information isn’t required by IRS but is helpful if you live in a state that requires you to pay an income tax (most states do). The amount reported on a form 1099-MISC tends to be the same for state and federal purposes. If you had any money withheld for state tax purposes (this is not common), it will be reported in box 16.
And remember: income is income. Just because you didn’t receive a form 1099-MISC for the year doesn’t mean that you don’t have to report the income. You must report all income unless it’s specifically excluded, even if it’s not reported on a specific form. If you have questions about what might be reportable, check with your tax professional.