Reporting Income Payments Using Form 1099-MISC

Form 1099-MISC is used to report payments made in a trade or business.

By , Guide

Form 1099-MISCis used to report certain types of payments made in the course of a trade or business. If you’re in business or self-employed, you may need to submit this report to both the Internal Revenue Service and the person or business whom you paid.

When is Form 1099-MISC Required?

Businesses will need to fill out a Form 1099-MISC for persons, vendors, subcontractors, independent contractors, and others in the following circumstances:

$600 or more per year is paid for

  • cash payments to fishermen
  • crop insurance proceeds,
  • medical and health care payments,
  • prizes and awards,
  • proceeds paid to attorneys,
  • rents,
  • services (including parts and materials), and
  • other types of payments not covered by another information reporting document.

$10 or more per year is paid for

  • broker payments in lieu of dividends or tax-exempt interest, and
  • royalties

Reporting such payments is required if the recipient of the payment is not a corporation — for example, when the recipient is an individual, partnership, a limited liability company treated as a partnership or sole proprietorship. Payments made to corporations are required in the case of medical and health care payments and in the case of legal fees paid to attorneys. Other types of payments made to corporations may be reported using Form 1099-MISC, but is not required. 

Report Payments Made by Cash or Check, but Not Payments Made by Credit Card

Starting with the 2011 tax year, the IRS is instructing businesses that payments made via credit card and other third party payment processing services need not be reported on Form 1099-MISC. Refer to the Instructions for Form 1099-MISC1, especially the What’s New2section. 

Expanded 1099-MISC Reporting Starting in 2011 for Rental Property Owners Has Been Repealed

Rental property would have needed to issue a 1099-MISC for payments relating to their rental properties beginning in the year 2011, but this requirement has been repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 20113

Expanded 1099-MISC Reporting Starting in 2012 Has Been Repealed

1099 reporting would have been expanded starting with the year 2012, but this provision has also been repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. Prior to repeal, reporting would have been expanded to include payments made to corporations and as well as to include payments for goods and property. The 1099-MISC expansion was originally legislated as part of the health care reform package4


Steps to Take to Prepare for 1099-MISC Forms

You should request that your vendors, contractors and other payment recipients submit to you a Form W-95. The W-9 will provide you with the legal name, address and taxpayer identification number for the vendor, which is the information you will need when preparing any 1099-MISC forms.You should also keep track of your payments in your bookkeeping system. You will need to know whether the payment falls under any of the categories listed above for reportable payments, whether your payments to a particular recipient reaches the $10 or $600 threshold for reporting, and finally you’ll need to know the exact amount you paid the recipient for the year.


Penalties for Filing Form 1099-MISC Late

The following penalties will be in effect for the year 2011:

  • $30 penalty for filing a 1099 not more than 30 days late;
  • $60 penalty for filing a 1099 more than 30 days late and before August 1;
  • $100 penalty for filing a 1099 on or after August 1;
  • $250 penalty for intentional failure to file.

These Form 1099-MISC penalties were increased as part of the Small Business Jobs Act6, and have not been repealed.

Deadlines for 1099-MISC Forms

  • Provide the recipient with his or her copy of the Form 1099-MISC by January 31 reporting income for the previous calendar year.
  • Mail the Form 1099-MISC to the IRS by February 28.
  • Or electronically file 1099s with the IRS by March 31.

Businesses can request a 30-day extension to file 1099s with the IRS using Form 8809. An extension does not permit additional time for providing the 1099 to the recipient. 

Form 1099-MISC Tax Resources

Properly Defined Dependents

Properly Defined Dependents Can Pay Off At Tax Time

By Kay Bell •

Your son is off at college. Can you still claim him as a dependent? The answer for most parents is “yes.” But, as is often the case with tax questions, determining who can be claimed as a dependent is not always a clear-cut exercise.

Dependent claims aren’t limited to children. An adult relative could qualify as a taxpayer’s dependent as long as he or she meets certain Internal Revenue Service conditions.

Dependency tests that must be met

By a child By a relative
Joint return
Not a qualifying child
Relationship/Household member
Gross income
Joint return

Making sure the requirements are met is critical, because dependents can help reduce your tax bill. In many cases, you can claim certain tax-cutting deductions and credits related to a dependent. The key tax breaks associated with a child are the child tax credit, the child and dependent care credit and the earned income tax credit.

Even if these added tax credits don’t apply to your situation, a dependent named on your return can still trim your taxes. Each dependent directly translates into an exemption, a specific dollar amount, adjusted annually for inflation, that you deduct from your adjusted gross income.

Child dependent tests

In order to claim a child as your dependent, the youngster must now meet four key tests:

  • Relationship test: The child must be your child, either by birth, adoption or by being placed in your home as a foster child. Even if the adoption isn’t yet final, if the child is living with you and the process is under way, it counts. A dependent child can also be your brother, sister, stepbrother, stepsister or a descendent of one of these relatives.
  • Residency test: The child must live with you for more than half of the year. If the youth is away temporarily for special circumstances, such as for school, vacation, medical treatment, military service or detention in a juvenile facility, these particular absences still count as time lived at home. A child who was born or died during the year is considered to have lived with you for the entire year if your home was the child’s home for the entire time he or she was alive during the year.
  • Age test: A child must be under a certain age depending on the particular tax benefit. For the dependency exemption, the child must be younger than 19 at the end of the year. However, a youth who was a student at the end of the year can be claimed as long as he or she is younger than age 24. There is no age limit if the individual is permanently and totally disabled.
  • Support test: This refers to the youngster’s contributions, not those of adults in the family. To qualify as a dependent, the child cannot provide more than half of his or her own support during the year.

The support issue usually is not a problem. However, if the child is a successful model, for example, he or she could bring in substantial income and therefore might not be able to be claimed as a dependent under this test. Even then, as long as the parents provide more than the youngster is bringing in, then the child would still qualify.

Even after the child meets the four qualifying tests, there are two other considerations before he or she can be claimed as a dependent for exemption purposes.

The youngster generally must also be a U.S. citizen, U.S. national or a resident of the United States, Canada or Mexico. An exception applies for certain adopted children.

And if married, the child cannot file a joint return unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.

Other dependent relatives

Other relatives also might be your tax dependent if they meet similar qualifying tests.

The first requirement is, obviously, that the person not be your qualifying child for tax purposes. The person also cannot be considered the dependent child of anyone else.

The person must live with you for the full tax year or be related to you. Relatives who do not have to reside in your home but who can be claimed as tax dependents include parents, siblings, grandparents, nieces and nephews, aunts and uncles and in-laws.

Your dependent relative must earn less than the personal exemption amount during the year, and he or she must get more than half of his or her total support for the year from you.

Qualifying relatives also must meet the same citizenship and joint tax filing requirements as do qualifying children.

Tiebreaker guidelines

Sometimes a child can be the qualifying child of more than one person. However, because the IRS only allows one taxpayer to claim the same youngster, all eligible taxpayers must decide who will claim the child and any ensuing tax benefits.

If you can’t agree and both of you list the youth on separate returns, expect the IRS to disallow one or more of the claims using tiebreaker rules.

Tiebreaker rules

  • First, the agency looks at whether only one person is the child’s parent. This would be the case, for example, if one credit claimant is a stepparent. The parent would get the credit.
  • If both taxpayers are the child’s parents, then the parent with whom the child lived the longest during the tax year would be allowed the credit. If the child lived with both separated parents for an identical amount of time, the credit would go to the parent with the highest adjusted gross income.
  • Finally, if neither person is the child’s parent, the IRS would then allow the credit to the filer with the highest eligible AGI.

If several children are involved in a family situation where two taxpayers may claim them, the adults can decide to share the children for tax purposes. For example, you and your three children live with your mother. You can claim one child as a dependent and your mother can claim the other two. Again, if such a sharing agreement cannot be reached, the tiebreaker rules would come into play.

Final exemption factors

A spouse is never considered a dependent. However, you can claim an exemption for your husband or wife as long as you file a joint return.

You also are allowed an exemption deduction for yourself. But if you file a return while being claimed as a dependent on someone else’s 1040, the IRS warns that you won’t be able to claim a personal exemption on your own return.

Details and relationship dependency examples are available in IRS Publication 501, Exemptions, Standard Deduction and Filing Information.