If you are a regular reader of our blog, you know we frequently address the question of employee classification. We will not go through that again here, but we do want to touch on the pesky 1099-MISC form. This is the form used to report income paid to independent contractors.
The 1099 was first introduced in 1917 in order to allow employers to report salaries in excess of $800. In the decades since, numerous variations of the 1099 have been developed. Their primary purpose is for reporting various kinds of income paid to workers – income that would not normally be included on the W-2 form.
Employers use the 1099-MISC to report payments to independent contractors. The forms are required for any independent contractor who earns at least $600 in a single tax year. Employers are required to complete the forms, providing one copy to the contractor and another to the government.
Independent contractors use the forms to keep track of their own income for tax purposes. Being that they self-pay FICA taxes (Social Security and Medicare) employers do not deduct any payroll taxes from contractor pay. All of this is pretty straightforward for individual contractors. Where it gets confusing is when 1099-MISC forms are required for corporate payments.
Payments to Corporations
Under the law, a corporation is a legally recognized person. As such, certain payments made to corporations are treated as income reportable on a 1099-MISC. For the purposes of IRS definition, nonprofits that receive any such payments are considered corporate recipients.
Examples of corporate payments that should be reported on a 1099-MISC include the following:
- Attorneys fees, consulting fees, etc.
- Payments made for healthcare insurance and medical expenses
- Payments made in lieu of tax-exempt interest or dividends
- Government payments made to vendors for services rendered.
The best way to understand this is to think of any payments that might be made to a corporation for services that could be performed by individual contractors. Because the corporation is a legal person, it is a person providing the same services a contractor would provide.
Examples of corporate payments that are not reported on the 1099-MISC include:
- Allowances for business travel (otherwise reported on a W-2)
- Payments for utility services, merchandise, storage, etc.
- Rental payments and real estate fees
- Payments made to active military personnel while on duty (otherwise reported on a W-2).
Do Not Try to Guess
Over the last 10 to 15 years, the IRS has been especially diligent about cracking down on companies that fail to file required 1099s. With that in mind, we strongly urge employers to not try to guess. If there is any question about employee classification or 1099-MISC issuance, you are better off contacting an experienced payroll provider like BenefitMall.
We make it our business to fully understand complex tax laws. We know how to determine whether or not a 1099s-MISC needs to be issued. We understand the difference between payments to independent contractors and those made to corporations. We can help you figure it all out as part of a comprehensive payroll solution.
Remember that any independent contractor who receives a 1099-MISC from your company is responsible for self-paying FICA taxes. There should be no withholding from that contractor's pay for payroll tax purposes. If your company is both withholding and issuing a 1099-MISC, something is wrong. You need to get it straightened out before the IRS gets involved.
Yes, the pesky little 1099-MISC is a confusing form. Do not let it cause problems for your payroll department. Instead, let BenefitMall handle payroll for you.