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 has become more complex, so I'll attempt to clarify the situation.
First, only one thing has "really" changed with 1099-MISC reporting. 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. (Source: What's New section of the Instructions for Form 1099-MISC, IRS.gov.)
The background story here is that third-party payment services are now issuing their own reporting document, called Form 1099-K, to report sales income received through credit card and other merchant account systems. The IRS is really interested in attempting to measure the total income of self-employed service providers. To that end, if the same payment is reported on both a 1099-MISC issued by the client and on a 1099-K issued by a merchant account provider, then the "total income" reported to the IRS for that service provider will be overstated. To prevent this sort of over-reporting, the IRS is instructing us not to report payments made credit cards (and similar payment mechanisms) on the 1099-MISC. In other words, the IRS wants us to do extra work with our 1099-MISC reporting so their computer systems will be able to accurately compile income data for independent service providers.
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purchase of goods, for payments made to corporations, and the mandate for the rental property owners to report) were repealed and no longer apply. Not repealed, however, were the higher penalties for not issuing a 1099-MISC form.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 made via check or cash, for specific types of 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.