IRS Form 1099-MISC: Rules and Exceptions

1099-misc irs forms Jan 19, 2020

IRS requires business owners to issue Form 1099-MISC to people or business entities they pay during the year. This is the governments way to ensure that if you are taking a business deduction, someone else reports the corresponding business income. Not all payments require filing Form 1099-MISC and there are exceptions to the rule.

There are two types of income that are reported on Form 1099-MISC: non-employee compensation and miscellaneous income, discussed in further detail below. These payments are not reported on a W-2 so the IRS provides the Form 1099-MISC for reporting them.

If you suspect you may need to issue a Form 1099-MISC, the first step is to collect a Form W-9 from the person or business you are paying or will pay. Ideally you collect the W-9 when you start doing business so you do not have to run around and track it down at the end of the year. The Form W-9 can be found and printed from the IRS website

Note: This blog covers the most common rules and exceptions related to the Form 1099-MISC rules. Consult IRS instructions and your tax professional for complete rules. 

Payments that qualify for 1099-MISC

The Form 1099-MISC is only for payments made in the course of operating a trade or business, including non-profits and certain trusts and other organizations. These payments are income to the person you are paying and need to be reported on their IRS tax returns. Payments unrelated to a trade or business are not reported on the 1099-MISC.

You are expected to obtain a Form W-9 and issue a Form 1099-MISC form if you meet the following payment criteria unless you fall under one of the exceptions described below. Payments during the calendar year that will qualify you to issue a Form 1099-MISC are:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
  • At least $600 business expenses for:
    • Rents.
    • Services performed by someone who is not your employee.
    • Prizes and awards.
    • Other income payments.
    • Medical and health care payments.
    • Crop insurance proceeds.
    • Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
    • Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
    • Payments to an attorney.
    • Any fishing boat proceeds.
  • Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
  • For each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.
  • Payments to an employee or their estate after their death

If your payment amount and type suggests a Form 1099-MISC is required, you may avoid issuing it if you meet one of the exceptions below.

Exceptions

The IRS provides many exceptions to the Form 1099-MISC reporting requirements. You may obtain a W-9 before determining the payment is exempt. For example, upon obtaining the W-9 you may discover the entity is taxed as an S-Corp, exempting you from issuing the 1099-MISC. In that case, retain the W-9 as evidence that you do not need to file the 1099-MISC. Specific exemptions are detailed below.

Corporations
You do not need to provide a 1099-MISC to most Corporations, including entities that elect to be taxed as an S-Corp. However, this exception does not apply if the payment is for legal services or medical/healthcare. See IRS Instructions for more information about reporting payments to attorneys and medical and healthcare payments. For all other entities, if you receive a Form W-9 that states the entity is a Corporation or is taxed as a Corporation, you do not need to file the 1099-MISC. 

Rent paid to real estate agents or property managers
If you rent space and your rent is paid to a real estate agent or property manager instead of to the landlord directly, the real estate agent or property manager is required to provide the property owner with the Form 1099-MISC. You may inquire if they are doing so and document the exception applies in your case.

Payments made via credit and debit card processors
If you make your payment using a credit card, debit card or other credit card processing method such as your bank card, PayPal, Square and Stripe, the payment falls under Form 1099-K rules instead. You do not need to issue the 1099-MISC. The credit card processor will issue a 1099-K if those rules apply. Note: Cash transfers via providers such as Zelle and Venmo, or checks issued via electronic banking, do not qualify for this exception and still require you to issue a 1099-MISC. Venmo terms of service preclude using it for business without permission.

Other exceptions
The following less common payments are also exempt from issuing a Form 1099-MISC. See the IRS Instructions for more details. 

  • Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
  • Employee payments of wages, military differential while on active duty, business travel allowances, (reported on Form W-2).
  • Cost of current life insurance protection.
  • Payments to certain tax-exempt organizations and governments.
  • Payments made to or for homeowners from certain state programs.
  • Certain forms of compensation by the Department of Justice/state programs.
  • See full IRS instructions for other exceptions for payments such as criminal informants, scholarships, foster care and cancelled debts. 

Deadlines for 2019

Regardless of the IRS filing deadlines, you are expected to furnish the person or entity you paid with a statement or a copy of the Form 1099-MISC by January 31, 2020. This provides the recipient time to review it before filing their own 2019 tax returns.

The IRS has several filing deadlines. If your 2019 payments include non-employee compensation (see the section below for details) your Form 1099-MISC is due by January 31, 2020 whether filing on paper or electronically. If your 2019 payments do not include non-employee compensation, the deadline is February 28, 2020 for paper filings and March 31, 2020 for electronic filings.

For more information see IRS 2019 General Instructions for Certain Informational Returns, Section C, "When To File." 

Non-employee compensation and Form 1099-NEC

For payment made in 2019 there is one Form 1099-MISC for all non-employee compensation and miscellaneous income. Non-employee compensation includes the type of payments listed below:

  1. Services performed by someone who is not your employee. This includes professional services, referral fees, parts and materials used to perform services, commissions, payments to independent contractors, value of services exchanged for other services, and taxable fringe benefits.

  2. Certain cash payments for fish (or other aquatic life).

  3. Payments to an attorney.

  4. Backup withholding.

There is a new IRS form to be used for payments made in 2020, which will be filed with the IRS in 2021. The Form 1099-NEC will be used for non-employee compensation while the Form 1099-MISC will continue to be used for all other payments. 

How to file

The easiest and best way to file your Form 1099-MISC is to utilize your tax preparer. If filing on your own you can use a filing service. Although Simple Profit does not endorse any particular service, common services are: Tax1099.com, Track1099.com, efile4biz.com, Turbotax or Quickbooks.

Subsequent years

If you have a Form W-9 from a prior year and do not believe the information has changed, you do not need to get an updated W-9. You can issue the Form 1099-MISC using the information you already have on file.

What if my landlord refuses to fill out Form W-9?

Ideally you will have collected the W-9 when you initially do business with someone. Sometimes people do not know the IRS rules and refuse to give you the information you need to file the 1099-MISC. If you have already paid them, there are a few things you can do. Print out the IRS rules found on their informational page About Form 1099-MISC and explain you are required to provide them a statement and file with the IRS. Ask them to speak to their accountant about this IRS rule. Finally, inform them you will need to file with the IRS whether you have complete information or not, but you would prefer to have their accurate filing information rather than the IRS track them down to get it. If you cannot obtain the W-9, do your best to fill out the 1099-MISC with as much information as you have.

Bottom line

Business owners need to review payments made during the year in early January to ensure compliance with this important IRS requirement. The rules for filing the Form 1099-MISC can be confusing and easily misunderstood. Once you know the rules, identify who you need to issue a 1099-MISC to and have gathered the Form W-9, the process is relatively simple and straight forward. 

 

Questions: email [email protected]

Jennie Schottmiller, LMFT, CPA is a licensed marriage and family therapist who practiced as a CPA prior to becoming a therapist. She has an active solo therapy practice and runs a facebook group for clinicians and offers courses to help small business owners with accounting, tax and financial analysis matters.

Disclaimer: This blog is for education only. Please consult with a qualified professional when you have any questions about your personal accounting, tax or legal situation. Information contained in this post is for informational purposes only and not intended to replace professional advice.

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