A Form 1099-MISC is used to report miscellaneous income. This form has undergone a recent update that changes how non-employee workers are paid.
If you’ve hired freelancers or independent contractors (or maybe you are one yourself), you might know how confusing tax forms can get, especially during tax season. One of the forms you’ve likely come across is called a 1099-MISC, which covers miscellaneous income. In this blog post, we’ll go over the nuances of Form 1099-MISC, including what it’s used for, major changes recently made, and toward the end, we offer the easiest way for businesses to go about collecting 1099 forms.
Form 1099-MISC is a tax form used to report miscellaneous income to the IRS. It's part of a larger collection of 1099 forms that are used to keep record of non-traditional income that doesn't fall into wages, salaries and tips. A Form 1099-MISC categorizes multiple types of payments beyond simple, unexpected income and is essential to many kinds of costs, from rents collected by a landlord to fishing boat proceeds. This tax form helps those receiving these unique income streams to comply with federal and state income tax laws.
In 2020, the IRS made a few major changes to Form 1099-MISC. Non-employee compensation reported in Box 7 has been removed from Form 1099-MISC. These workers, which include contractors, freelancers, sole-proprietors and self-employed individuals, must now be reported in a new form called 1099-NEC (Non-Employee Compensation).
What is a Form 1099-MISC used for?
A 1099-MISC covers many potential income streams. The IRS states that this form must be given to each person who has been paid the following:
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
At least $600 in:
Rents-Prizes and awards
Other income payments
Generally, the cash paid from a notional principal contract to an individual, partnership or estate
Any fishing boat proceeds
Medical and health care payment
Crop insurance proceeds
Payments to an attorney (though there are additional rules for this)
Section 409A deferrals
Non-qualified deferred compensation
This covers a large span of items that count as non-traditional income. Read through the following PDF for complete details and instructions when filing Forms 1099-MISC and the new 1099-NEC.
Anything over the $600 mark typically requires a Form 1099-MISC filing. A good example is in the case of brokers and broker payments taking profit from selling stocks in lieu of dividends. Another example could be a hair salon that collects rent payments for their chairs.
Simply put, someone who provides work for you but is not an employee of yours qualifies as a 1099 vendor. However, remember that they would file a 1099-NEC, not a 1099-MISC. Furthermore, vendors that your company pays more than $600 per year for services rendered must receive a 1099 form from you for tax purposes. As mentioned, this applies to numerous individuals, from freelancers to independent contractors, so make sure they have the proper forms! It can be confusing for many companies that are used to using a 1099-MISC for most of their non-employee payments, but keeping these two straight is essential for companies that want to stay in compliance.
Only payments made in the course of your trade or business need to be filed under a 1099-MISC (personal payments aren't reportable in this way). For every person that you have paid either $10 in royalties or over $600 if they fall into the other IRS requirements we noted above, you need to file a Form 1099-MISC. Note that you also have to file one of these forms for people in those categories in which you have withheld any federal income tax under backup withholding rules, no matter the amount you pay them.
Your first step in collecting 1099-MISC forms from vendors is to give them a W-9 in order to gather tax information such as a taxpayer identification number (TIN). Once you have that information, you can use it to fill out their Form 1099-MISC. Note that if payments were made with a credit or payment card or certain other payments like third-party network transactions, you need to report this on a Form 1099-K and don't have to report it on a 1099-MISC.
It's often troublesome for businesses to pay 1099 vendors because they aren't on a traditional payroll. But it's becoming all the more important for fast-growing industries to streamline the 1099 payment process and its tax-related information. For example, the gig industry, which relies on contingent workers, has shown tremendous growth over the last year with no sign of slowing down.
Additionally, it isn't uncommon for rules to change as they did for the 1099-MISC and 1099-NEC, which is still causing confusion for everyone involved. That’s where an automated solution like Routable can save your company significant pain and time.
Routable offers services for collecting 1099s and paying contractors such as:
Small business owners enjoy the confidence—and assurance—that once their invoice has been approved, they’ll see their payment directly in their account.
Fast, reliable ACH payments means contractors submit one-time, secure, encrypted bank account information without having to share sensitive documentation over email. Payments are processed quickly and efficiently throughout the lifecycle of the relationship.
Paying multiple freelancers and gig workers at once can be time consuming. Routable processes hundreds of payments at once with CSV uploads while identifying duplicates or potential errors. You can also leverage our API if you have developer support.
Collect 1099 forms and store them in one easy-to-search format. As part of your onboarding process, you can collect W-9s to gain all of the tax information you need to successfully send out your 1099-MISC forms. Our software also gives vendors the freedom to manage their own bank account information and W-9 details through a secure site to make them feel safe throughout the process.
Even though there's a lot to keep in mind with taxes and the IRS, a little knowledge goes a long way, and with a bit of understanding, it can put you that much further ahead. Accurate documentation is essential, especially in a digital world, but thankfully, that's being made easier by the day. Using accounting software such as Routable can help empower your team by saving time for them, while also improving vendor relationships through smooth and easy onboarding processes.
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