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Form 1099-MISC - Miscellaneous Income. Understanding Form You Might Need for Your US Tax Return

Form 1099-MISC - Miscellaneous Income. Understanding Form You Might Need for Your US Tax Return
Ines Zemelman, EA
15 September 2016

There is most likely a tax form tower sitting on the desk, or probably just thrown on your kitchen counter - forms from banks, lenders, employers, stockbrokers, and many others. For some people, the forms will just be handed over to your tax preparer; for others, you will take the information from the forms and input it into your favorite tax software - perhaps even uttering a few four-letter words as you go. Regardless of how you intend to complete your taxes, you probably don’t know all the details about what the many letters, numbers, and other data printed on the forms mean. This is one of several posts that will change that, and help you start to understand the multitude of tax forms.

Form 1099-MISC, Miscellaneous Income

The Form 1099-MISC, Miscellaneous Income, reports income that cannot be nicely categorized to fit on any other form.

One purpose of this form is to report payments that are made due to the operation of a business or trade. Payments for services such as lawn mowing, do not need to be reported. That does not mean that these payments are not looked upon as income - they are, and are most likely taxable. It only means that the payer does not have to report the payments to the IRS (or to you on a 1099-MISC).

It is also not required for a payer to issue this form for payments that are made to corporations, including an LLC treated as an S or C Corporation; payment for freight, storage, telephone, merchandise, and similar things; payments for rentals; wages and payments made to employees (find those on Form W-2); payments for wrongful incarceration; compensation paid by the Department of Justice for disability benefits or survivor’s benefits; and some benefits for dependents of deceased public safety officers. Also, fellowship grants and scholarships, as well as fees paid for compensation of informers do not need to be reported on a 1099-MISC. Finally, any payments that should be on another form, such as a 1099-K, a 1099-C, and any other form do not get reported on a 1099-MISC.

Along with the specific criteria that require the issuance of a 1099-MISC (described below), a 1099-MISC will be issued when federal tax is withheld because of backup withholding requirements irrespective of the payment amount.

Here is what a Form 1099-MISC usually looks like:

The Form 1099-MISC in More Detail

The left, top, side of the form has the payer’s information, and your information is on the left, lower side of Form 1099-MISC. Either your full Social Security Number (SSN), or perhaps only the last couple digits, is likely to be printed there as well. Although your full SSN is required for some other forms, such as the W-2, on the 1099-MISC the first few digits may be eliminated to help protect your privacy. Regardless of what is printed on the form, the lender sends your complete Social Security Number with Copy A when it is sent to the IRS.

Some fairly new regulations require some payers to comply with the requirements of the Foreign Account Tax Compliance Act (FATCA) by checking the related box on Form 1099-MISC. If there is a check in the box for FATCA, you might have a requirement for FATCA reporting. Ignore the check in this box at your own peril - the consequences of making mistakes in regards to FATCA can be very serious, including be charged with criminal offenses.

Box 1

If you received rents of more than USD 600 within the year, that will be in the Box 1 amount. Included in this is rent for coin operated games as well as machine rentals.

Box 2

Box 2 reports royalty payments of more than USD 10 gross. This includes gas, oil, or mineral property royalties. It does not include surface royalties (which are reported in the Box 1 amount), working interest gas or oil payments (reported in the Box 7 amount), or royalties from timber pay-as-cut contracts (which have their own form). Royalty payments from intangibles are also reported in Box 2, such as trademarks, trade names, copyrights, and patents.

Box 3

If your luck was good and you won the lottery, those winnings may be reported in Box 3. This includes profits from Indian gaming, awards, prizes (including any winnings from fantasy sports), taxable damages, and other income exceeding USD 600. Box 3 also reports amounts received by beneficiaries of deceased employees. This may seem a little odd, but remember that Box 3 gets used for reporting income not reportable in other boxes or on other forms. Usually, the number in Box 3 will go on line 21 of your 1040, in the line for “other income”. But, if the amount is from a business or trade, it should be reported on a Schedule C and/or Schedule F.

Box 4

If any federal tax is withheld, it will be in the Box 4 amount. Usually, this is from backup withholding for people who didn’t give their tax ID number (TIN), or who had another requirement for backup withholding.

Box 5

While not likely applicable to many, proceeds from fishing boats will be in Box 5. This box includes any share in proceeds from sale of the catch, and the fair market value of distributions in kind for boats normally having less than 10 members of the crew. Also, cash payments less than 100 USD per trip that are contingent on minimum catches, and paid only because of additional duties get reported in Box 5. Wages, though, will be on the W-2, not on the 1099-MISC.

Box 6

Payments you received of at least USD 600 as a doctor or other provider or supplier of healthcare or medical services will be in the Box 6 amount. This is only for payments made in the conduct of business (not things like personal visits). It also includes payments by insurers under accident, sickness, and health insurance programs. Payments made from Health Reimbursement Arrangements (HRAs) or Flexible Spending Arrangements (FSAs) might be excluded from the reporting requirements. Exemption from Form 1099-MISC issuance to corporations is not applicable to health care or medical services payments to corporations, which includes professional corporations. This is similar to attorney fees (discussed below).

Box 7

This box most likely draws the greatest amount of attention. Box 7 reports nonemployee compensation of more than USD 600. While most people associate nonemployee compensation with freelance work, it also is inclusive of commissions, fees, awards, and prizes for nonemployee services performed (assuming it isn’t paid to corporations). It is also inclusive of other types of compensation paid for services in the conduct of business by anyone who isn’t your employee. It even includes cash purchases of fish (see the instructions for the form if this isn’t believable).

As was mentioned above, you will also see gas and oil payments from working interests in the amount reported here. If you are conducting a business or trade, these payments will be reported on your Schedule C, where they are subject to the self-employment tax. (Although, if the payment is for a non-business reason or a hobby, most likely it will go on the 1040 at line 21, so will not be subject to the tax on self-employment.)

Fees for professional services (for example, contractors and accountants), along with certain commissions, fee splitting arrangements, referral arrangements, fringe benefits, and bartering fees, are also reported in Box 7.

Payments known as “Golden parachutes”, along with nonqualified deferred compensation (includible as gross income due to the plan failing to meet requirements in section 409A) are also in this box as well.

Box 8 - Box 13

For most people, it is uncommon for these boxes to contain an amount.

  • Box 8 is for Substitute Payments in Lieu of Dividends or Interest. This includes total payments of USD 10 or more that a broker receives for his customer in place of tax-exempt dividends or interest because of loaning customer’s securities.
  • Box 9 will be checked if you got at least USD 5,000 of products due to a deposit-commission, buy-sell, or other type of commission arrangement for resale.
  • Box 10 will report insurance payments of at least USD 600 paid to a farmer from a crop insurance policy.
  • Box 11 and Box 12 will be blank.
  • Box 13 is for golden parachute proceeds that are subject to a 20 percent excise tax.

Box 14

Gross amounts of at least USD 600 paid to attorneys are in the Box 14 amount. This is the case even though the attorney may actually be a corporation, or even if the payer did not receive legal services. Even if some money is payable to a third party, or if the client and attorney are on a single settlement check, the amount must be reported here. In this case, make sure to note the explanation for the difference between the amount on the form and the amount you report when you file the tax return.

Box 15

Usually, Boxes 15a and 15b are empty since reporting for Section 409A might be done on other forms. If Box 15b has an entry, it should also be in the Box 7 amount.

Box 16 - Box 18

Box 16, Box 17, and Box 18 report state information for one or two states. The IRS does not require this information, but it is useful to you if you are in one of the states that has income tax (as most do). Often, the amounts on Form 1099-MISC are the same from both the federal and state tax perspectives. If any money was withheld for the state tax, it will show up in the Box 16 amount, although this isn’t very common.

In Summary

Don’t forget that income is considered income. Even if you don’t receive a 1099-MISC, that does not mean you do not need to report all of the income. Even if income is not reported to you on a particular form, you must include the income on your taxes (unless it is specifically excluded). As always, contact your tax preparer with any questions.

For information on other relevant tax forms, look for other articles in this series.

Ines Zemelman, EA
founder of Taxes for Expats