When you hire contract workers or outsource work to businesses or individuals who are not employees of your company, you may be required to prepare and send them a 1099-MISC at tax time.
If you pay a company or individual $600 or more in a calendar year, you will need to send a 1099-MISC form to report that income to the IRS, and also give the service provider a document to file with his or her income taxes.
Who Needs a 1099-MISC?
In addition to sending a 1099-MISC form to each person or company, you pay more than $600 per year for services, medical and medical insurance payments, or awards and prizes; there are a handful of other situations that result in the need to file a 1099-MISC form:
- Payments to attorneys equal to or more than $600
- Royalties of $10 or more
- Broker payments instead of dividends or tax-exempt interest
- Fishing boat proceeds
- Direct sales greater than $5,000 of consumer products anywhere outside a retail establishment
- Any person from whom you withheld federal income tax for backup withholding rules (regardless of the amount of the payment)
Who Does Not Need a 1099-MISC?
You do not have to send a 1099-MISC form to corporations that you’ve made payments to, even though corporation must report the income that they receive. The following transaction types are also exempt from 1099-MISC filing requirements:
- Rent paid to real estate agents
- Life insurance payments
- Travel allowances paid to employees
- Payments for purchasing merchandise, storage, freight, and other items
- Salary and wages paid to employees
- Payments made to tax-exempt organizations
How to Prepare and Send 1099-MISC Income Forms
Make a list of any contract workers and others that you are required to send a 1099-MISC Income form to. Decide whether you will fill out the forms yourself or use electronic filing.
Manual Forms: If you want to fill in the forms by hand, you can order official 1099-MISC forms from the IRS, fill them out, and mail them in.
Electronic Forms: Choose an e-filing service for preparing and sending 1099-MISC forms. The IRS lists several options on their website; and you can do a general search online for various companies that allow you to fill in forms online, print and electronically file.
You will need your Employer Identification Number (EIN). Enter this number on the Payer’s federal identification number line. If you do not have an EIN, you can use your Social Security number. You will also need the Social Security number of the person receiving the 1099-MISC.
Fill in the amount paid to the contract worker in Box 7 for Non-Employee Compensation. If there are any federal or state taxes withholding to report, enter this in Box 4 or Box 11. Most businesses paying contract workers will not withhold income tax for the workers.
Once the 1099-MISC Income form is completed, mail Copy B and Copy 2 to the contract worker on or before January 31st of the year following the year in which payments were made. Copy 1 is sent by February 28th to the state tax revenue department. Copy A should be filed with the IRS on or before February 28th along with Form 1096. If you are filing electronically, you have until March 31st. Additionally, remember to keep Copy C for your records.