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William Perez

Tips for Preparing Form 1099-MISC

By January 17, 2012

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Self-employed persons and businesses of any size are required to report payments for services rendered by independent vendors by using Form 1099-MISC. For the year 2011, Form 1099-MISC reporting is exactly the same as it has been in the past. There has been some confusion of the previous expansion and subsequent repeal of various rules surrounding 1099 reporting, so I'll attempt to clarify the situation.

Legislative changes has caused confusion among business owners. Congress had planned to expand coverage of the types of payments reported on Form 1099-MISC in three ways: by requiring reporting for the purchase of goods and property, by requiring reporting of payments made to corporate vendors, and by requiring rental property owners to begin submitting 1099-MISC reports. These expansions were to have begun for the year 2011. However, all three expansions (for the purchase of goods, for payments made to corporations, and the mandate for the rental property owners to report) were repealed and no longer apply. Not repealed, however, were the higher penalties for not issuing a 1099-MISC form.

The original expansion of the 1099-MISC reporting (which was part of the massive health care reform legislation known as the Affordable Care Act) caused quite a stir, and accordingly many people remember the expanded reporting requirements. Form 1099-MISC is not required to report payments for goods and property, to report payments to corporate vendors (unless the payment is for health care or legal services), and landlords are not required to issue 1099-MISC forms.

Let's talk about what goes on the 1099-MISC and what doesn't go on this form. Form 1099-MISC is used to report various types of payments made to independent vendors, including compensation paid to non-employee service providers, payments for legal and health services, payments for rent, and for prizes. When analyzing what gets reported on Form 1099-MISC, we need to bear in mind the following factors:

  • the tax structure of person or business being paid,
  • the total amount paid to that person or business during the year,
  • the nature of the payment (what the payment was for), and
  • the form of payment (whether cash, check, credit card, debit card, or some other "third-party" payment mechanism such as Paypal).

What gets reported on the Form 1099-MISC are payments if the total amount paid is at least the relevant threshold amount, and payments are made to specific tax structures. If you keep this criteria structure in mind, it's easier to follow the IRS's instructions.

Don't get too caught up in the "requirements." The Form 1099-MISC requirements do seem overly complicated, but let's remember what required means. Required means that, if certain conditions are met, then reporting is required. You may submit a 1099-MISC even if it is not required. For example, you may send a 1099-MISC to a corporation, or if the total amount paid falls under the $600 annual threshold. I mention this for two reasons: it may be easier just to issue 1099-MISC forms to everyone, and it may come in handy at audit time. If your business is audited, the IRS agent will usually inquire whether all required 1099-MISC documents have been filed. A 1099-MISC thus serves a dual purpose: to document that you paid a deductible business expense, and helps you avoid one of the more nit-picky audit issues.

Review the 1099-related reports in your bookkeeping software. Bookkeeping software should be able to generate a report showing you what needs to be reported on a 1099-MISC. But you may need to take additional steps to generate a reliable report before preparing your 1099s. Here's information about generating 1099 reports in Quickbooks, for example. (I haven't been able to find good tips for other bookkeeping software. If you know of any Web pages on this topic, feel free to post them in the comments.)

Want to see the 1099-MISC analysis in action? Tax professional Robert Flach recaps the 1099-MISC situation and walks readers through an example of how to report the proper amount in his blog post, To 1099 or Not to 1099, That is the Question. Jean Murray, my colleague at About.com, provides additional tips in her article on Preparing Form 1099-MISC for 2011.

Comments
February 29, 2012 at 4:46 am
(1) W Thomas says:

1. When I pay bills online, my bank utilizes what they call a “third party payment processor.” If I make payments this way, am I exempt from having to file a 1099-MISC?

2. Does a landlord have to file a 1099-MISC for payments to a law corporation?

February 29, 2012 at 11:56 am
(2) William Perez says:

W. Thomas, the requirement to issue 1099-MISC forms applies to people who are engaged in a trade or business. If you do operate a business, then you’ll need to issue a 1099-MISC to any vendor to whom you paid $600 or more during the course of the year for services rendered. The method of payment to that vendor is not a relevant factor. Landlords are not required to file 1099s unless that rental activity is considered a trade or business instead of as a passive activity.

February 29, 2012 at 4:50 pm
(3) Will says:

So I’m confused when you say in the comment above that ‘the method of payment is not relevant and you need to issue a 1099-MISC to any vendor you paid more than $600 to”

But in the article you say “Starting with 2011, the IRS wants businesses to report only payments made via cash or check on Form 1099-MISC. Payments to independent service providers made via credit card or other “third party” payment processors do not need to be reported on the 1099-MISC.”

which one is it? I can find nothing on irs.gov that even mentions this (including the what’s new link) If it’s the latter, can you provide a proof where it says that in IRS docs? thanks!

also what is a bank wire transfer considered is it like cash or check?

cheers

February 29, 2012 at 6:29 pm
(4) William Perez says:

Will, thanks for alerting me to this. I can no longer find the source from the IRS, so I am retracting my previous statements.

March 1, 2012 at 6:52 am
(5) Will says:

here is the link for that info:
http://www.irs.gov/instructions/i1099msc/ar02.html

under “Exceptions” the text reads:
Certain payment card transactions if a payment card organization has assigned a merchant/payee a Merchant Category Code (MCC) indicating that reporting is not required. A cardholder/payor may rely on the MCC assigned to a merchant/payee to determine if a payment card transaction with that merchant/payee is subject to reporting under section 6041 or section 6041A. For more information and a list of merchant types with corresponding MCCs, see Revenue Procedure 2004-43 available at http://www.irs.gov/irb/2004-31_IRB/ar17.html.

May 10, 2012 at 8:24 pm
(6) J Pat says:

So, If you are paying a vendor for goods sold (they are LLC). Can you send them a 1099-misc? If so, what line on 1099-misc should it go? Would this also not help the IRS account for everything on your schedule C better and may help from getting auditted? Meaning if you sent a 1099-misc to every expense and goods sold then the IRS might have the whole picture. Thxs

October 12, 2012 at 8:54 am
(7) fmaggi says:

so…if you are a vendor using paypal (e.g. I don’t accept credit card payments) Do I or Don’t I:

- need to fill out Form 1099
(no for under 200 transactions or $600??)

- need to send 1099 to Paypal??

Or, just list the income freely on my tax form and be done with it.

Thanks for your reply.

February 7, 2013 at 9:52 am
(8) John says:

So, I’m always curious about whether or not Landlords are required to file 1099-MISC forms to individuals. Ignoring the NEW requirements that were repealed, haven’t Landlords always been required to send them to Individuals? Reading the official 1099-MISC form, the IRS seems to make it pretty clear:

“Report on Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit.”

They basically just say that you ARE engaged in a “trade or business” if you operate for gain or profit, right? Don’t all Landlords operate “for gain or profit”? Where is the confusion or exception that removes Landlords from that requirement by stating that they are NOT engaged in a “trade or business”?

Is there another definition of “engaged in a trade or business” elsewhere that better clarifies this? Because, again, the 1099-MISC form itself seems to make it pretty simple: you ARE engaged in a “trade or business” if you “operate for gain or profit.”

You seem to be saying that Landlords still need to determine if they are “engaged in a trade or business” to figure out if they have to send 1099-MISC forms or not to individuals. How does a Landlord determine this if it is something OTHER than what it says on the 1099-MISC form (which is just that they “operate for gain or profit”)?

February 7, 2013 at 9:57 am
(9) JohnMI says:

So, I’m always curious about whether or not Landlords are required to file 1099-MISC forms to individuals. Ignoring the NEW requirements that were repealed, haven’t Landlords always been required to send them to Individuals? Reading the official 1099-MISC form, the IRS seems to make it pretty clear:

“Report on Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit.”

They basically just say that you ARE engaged in a “trade or business” if you “operate for gain or profit”, right? Don’t all Landlords “operate for gain or profit”? Where is the confusion or exception that removes Landlords from that requirement by stating that they are NOT engaged in a “trade or business”?

Is there another definition of “engaged in a trade or business” elsewhere that better clarifies this? Because, again, the 1099-MISC form itself seems to make it pretty simple: you ARE engaged in a “trade or business” if you “operate for gain or profit.”

You seem to be saying that Landlords still need to determine if they are “engaged in a trade or business” to figure out if they have to send 1099-MISC forms or not to individuals. How does a Landlord determine this if it is something OTHER than what it says on the 1099-MISC form (which is just that they “operate for gain or profit”)?

Thank You for your comments!

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