A Summary of the 1099-MISC Rules

12/17/2009

By Joseph M. Press, CPA, CFE

The time is rapidly approaching when 1099-MISC forms will be due. We often get questions from banks about who should receive a 1099-MISC form. Since the IRS is placing increased focus in the area of information reporting, it is a good time to review the rules for the 1099-MISC form.

Who gets a 1099-MISC?

A 1099 is due to any person to whom you, as part of your trade or business, give $600 or more to a non-corporate entity for the following (personal payments do not require a 1099):

1. Rents (box 1)
2. Services (box 7) (includes parts and materials). Examples include accountants, architects, contractors, engineers, janitors, plant caretakers.
3. Prizes and awards
4. Other income payments (box 3)
5. Medical and health care payments (box 6)
6. Crop insurance proceeds (box 10)

In addition, any gross proceeds or fees paid to an attorney must be reported, regardless of amount. In addition, even if the attorney firm is a corporation, it still must get a 1099 (see exception for corporations below). Legal fees get reported in box 7 while proceeds paid to an attorney (as part of a settlement agreement for example) would be reported in box 14.

A 1099 is also due when you make at least $10 in royalty payments (box 2).

What are the exceptions to giving a 1099-MISC?

Generally there are two types of payments banks will encounter that will not require a 1099. The first includes payments for merchandise, telegrams, telephone, freight, storage and similar items. The second relates to payments to corporations. Corporations are not, as of yet, required to get a 1099, even if they are for such items as listed above. One exception to this is attorney fees as previously mentioned. Another relates to medical and health care payments.

The IRS would like to expand the reach of information reporting and there has been talk at the IRS of removing the corporate exception altogether. It remains to be seen if this will be the case, but don’t be surprised if it does.

How do I know what kind of entity a payee is?

All vendors (non-employees) with whom the bank does business should be given a W-9. The W-9 is a very simple form designed to obtain information necessary to determine if a 1099 will be due, and if backup withholding may be required. The form asks for the payee’s social security number or EIN along with designating what kind of entity they are (e.g. individual, corporation or partnership).

If the payee does not return the W-9, doesn’t properly fill it out, or gives you an incorrect identifying number, you are required to withhold 28% of any payments you give them (box 4). Attorneys who do not properly provide their identifying number are subject to further penalties. It is better to make sure you get this form properly filled out before you make any payments. That way you have some leverage of getting it using the threat of backup withholding. A good policy is to never make payment to any payee without a valid W-9. You can make use of the IRS TIN Matching Service so that you can verify the information you’ve been given matches IRS records. This will avoid getting notices from the IRS later that the information you filed on a 1099 does not match their records. Much time and headache can be avoided in this way.

In short, if you receive a properly filled out W-9 which designates your accountant as a corporation, then you do not need to give them a 1099. However, your self-employed cleaning person would need a 1099. Your attorney will always get a 1099 regardless of entity type or amount paid.