Article written by:
Daniel Conroy, CPA
Tax Senior
It’s the second week of January and you receive a message from your accountant asking if you need to file a Form 1099 for anything. They further explain the fact that there are a total of 17 different 1099 forms that can be filed for various purposes and that these are due to the recipients by January 31. Thankfully, they tell you that the majority of these will not apply to your trade or business. The area that seems to cause the most confusion is what business owners are required to report for payments made in the course of carrying on their trade or business. For purposes of this discussion, the focus is on 1099‐MISC reporting. As a general rule – keep the amount of $600 in your head at all times. Any payments of at least $600 in the following will need to be reported on Form 1099‐MISC:
- Rent
- Services performed by someone who is not your employee
- Prizes and awards
- Other income payments
- Medical and health care payments
- Payments to an attorney
This is just a short list of the most common types of payments that a business owner will come across and is not all encompassing. There are also some payments that do not have to be reported on Form 1099. The most common being payments made to a corporation, and even this one has its caveats.
For business owners, the most common payments that require 1099‐MISC reporting (and cause the most confusion) relate to nonemployee compensation. Any payment that is being made in the amount of $600 or more for services performed for your trade or business by a non‐corporate entity or an individual who is not your employee must be reported on Form 1099‐MISC.
What is considered nonemployee compensation? If the following four conditions are met, you must generally report a payment as nonemployee compensation.
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your trade or business
- You made the payment to an individual, partnership, estate, or, in some cases, a corporation
- You made payments to the payee of at least $600 during the year
The issue is further complicated by the classifying of an individual as either an independent contractor or an employee. These rules can be quite nuanced, and business owners should be aware of the factors considered in determining a worker’s classification.
The rules pertaining to 1099 reporting, and related worker classification, can be rather complex. Further, the penalties for failing to be compliant can be substantial. Contact your GBQ advisor to determine what the risks and opportunities are for your specific business.
For additional information see the following:
- https://www.irs.gov/pub/irs‐pdf/i1099gi.pdf
- https://www.irs.gov/pub/irs‐pdf/i1099msc.pdf
- https://www.irs.gov/pub/irs‐pdf/p15a.pdf
