What Form 1099-MISC Is For

Form 1099-MISC is the IRS information return that businesses use to report various types of payments made during the year to independent contractors, service providers, and others who are not employees. Think of it as the business equivalent of a W-2, except it's for people who work for themselves or provide services without being on the company payroll.

If your business paid someone $600 or more during 2012 for services, rents, prizes, or other types of income—and that person wasn't your employee—you likely need to file Form 1099-MISC. The form helps the IRS track income that recipients must report on their tax returns. It's a critical piece of the tax reporting puzzle that ensures everyone pays taxes on money they've earned, even when it's not from traditional employment.

The form covers a wide range of payments: rent payments to landlords, fees to freelance professionals like accountants or consultants, prizes and awards, medical and health care payments, royalties, fishing boat proceeds, and payments to attorneys. By filing this form, you're essentially telling the IRS, "We paid this person this much money for this type of work or service."

When You’d Use Form 1099-MISC (Including Late and Amended Filings)

Standard Filing Timeline

For tax year 2012, you must file Form 1099-MISC with the IRS by February 28, 2013 if filing on paper, or April 1, 2013 if filing electronically. You must also provide a copy to the recipient by January 31, 2013—or February 15, 2013 if you're reporting amounts in Box 8 (substitute payments) or Box 14 (gross proceeds paid to attorneys).

Late Filings

Life happens, and sometimes you miss deadlines. If you realize after the deadline that you should have filed a 1099-MISC, file it as soon as possible. The IRS assesses penalties for late filing (see section below), but filing late is always better than not filing at all. To potentially reduce penalties, you can request an automatic 30-day extension by filing Form 8809 before the original due date, with the possibility of an additional 30-day extension under hardship conditions.

Amended/Corrected Returns

If you discover an error after filing—whether it's the wrong payment amount, incorrect taxpayer identification number (TIN), or misspelled name—you must file a corrected Form 1099-MISC. Check the "CORRECTED" box at the top of the form, enter all information correctly (not just what changed), and file it with the IRS using Form 1096. You must also provide a corrected copy to the recipient. Don't delay; the sooner you fix errors, the less likely you'll face accuracy penalties.

Key Rules or Details for 2012

The $600 Threshold

This is the magic number. If you paid someone $600 or more during 2012 for services, rents, or most other types of miscellaneous income, you must file Form 1099-MISC. Lower thresholds apply to certain payments: only $10 for royalties or broker payments in lieu of dividends.

Trade or Business Requirement

You only report payments made in the course of your trade or business. Personal payments—like paying your neighbor to mow your personal lawn—don't require a 1099-MISC. However, nonprofit organizations, government agencies, and even trusts are considered to be engaged in trade or business for reporting purposes.

Corporate Exception

Generally, you don't need to issue Form 1099-MISC to corporations. But important exceptions exist: you must report payments to corporations for medical and health care services (Box 6), attorneys' fees (Box 7), gross proceeds to attorneys (Box 14), and fish purchases for cash (Box 7).

Backup Withholding

If a contractor fails to provide you with their TIN or provides an incorrect one, you must withhold 28% of payments as "backup withholding" and report it on Form 1099-MISC in Box 4. This protects you from IRS penalties for the recipient's failure to provide proper identification.

Repeal of Rental Property Expense Reporting

Good news for landlords—the 2011 requirement to report certain rental property expenses was repealed by Congress. For 2012, you don't need to report those payments on Form 1099-MISC.

Electronic Filing Requirement

If you must file 250 or more Form 1099-MISC returns, you're required to file them electronically unless you obtain a hardship waiver using Form 8508.

Step-by-Step (High Level)

Step 1: Collect Information Throughout the Year

Before you pay any contractor or service provider $600 or more, have them complete Form W-9 (Request for Taxpayer Identification Number and Certification). This form captures their legal name, business name, address, and TIN (Social Security Number or Employer Identification Number). Keep these on file—you'll need this information to complete Form 1099-MISC accurately.

Step 2: Track Your Payments

Maintain detailed records of all payments to contractors and service providers throughout 2012. Your accounting software or bookkeeping system should categorize payments by type (services, rent, royalties, etc.) and by recipient. At year-end, total all payments to each recipient.

Step 3: Determine Who Gets a 1099-MISC

Review your payment records and identify everyone who received $600 or more (or $10 for royalties). Remember to exclude corporations (with the exceptions noted earlier), employees (they get W-2s), and payments for merchandise or similar items.

Step 4: Complete Form 1099-MISC

Order official forms from the IRS or use approved tax software. For each recipient, complete a Form 1099-MISC with:

• Your business information (payer) in the upper left
• Recipient's name, address, and TIN
• Payment amounts in the appropriate boxes (Box 1 for rents, Box 7 for nonemployee compensation, etc.)
• Any federal income tax withheld in Box 4

Step 5: File with the IRS and Provide Copies

Send Copy A of all forms along with Form 1096 (the transmittal form) to the IRS by February 28, 2013 (paper) or April 1, 2013 (electronic). Mail to the appropriate IRS service center based on your location. Provide Copy B to each recipient by January 31, 2013. Keep Copy C for your records.

Step 6: Report on Your Business Tax Return

The amounts you report on Forms 1099-MISC should match the deductions you claim on your business tax return (Form 1120, 1065, Schedule C, etc.). This consistency helps avoid IRS inquiries.

Common Mistakes and How to Avoid Them

Mistake #1: Incorrect or Missing TINs

This is the most common error. Always collect Form W-9 before making payments. If you discover a name/TIN mismatch after filing, the IRS will send you a "B" notice. Verify the correct information with the recipient and file a corrected return. Failure to correct can result in backup withholding requirements.

How to Avoid

Use the IRS TIN Matching program before filing. This free service allows you to verify name/TIN combinations against IRS records, preventing costly notices and penalties.

Mistake #2: Reporting in the Wrong Box

Different types of payments go in different boxes, and the IRS watches carefully. For example, nonemployee compensation belongs in Box 7, not Box 3. Putting payments in the wrong box can trigger self-employment tax issues for recipients.

How to Avoid

Read the specific instructions for each box carefully. When in doubt, consult the IRS instructions or a tax professional. Box 7 is for services; Box 1 is for rents; Box 3 is for other income like prizes not for services.

Mistake #3: Issuing to Corporations When Not Required

Many businesses waste time and money issuing 1099-MISC forms to corporations when they don't need to (except for the specific exceptions mentioned earlier).

How to Avoid

Always review the recipient's Form W-9. If it shows "C Corporation" or "S Corporation" as the tax classification and you're not paying for medical services or legal services, you typically don't need to file.

Mistake #4: Missing the Recipient Copy Deadline

The IRS gets upset if you miss their filing deadline, but the IRS and the recipient get upset if the recipient doesn't receive their copy by January 31. This can cause recipients to underreport income and face their own penalties.

How to Avoid

Mail recipient copies by mid-January to ensure timely delivery. Consider using certified mail for high-dollar amounts to prove delivery.

Mistake #5: Including Reimbursed Expenses

If you paid a contractor $5,000 for services plus $1,000 reimbursement for materials they purchased for your project, do you report $6,000 or $5,000? Generally, report the total $6,000 unless the reimbursement was made under an accountable plan with proper documentation.

How to Avoid

Clarify expense arrangements upfront with contractors. If materials are significant, consider purchasing them yourself rather than reimbursing the contractor.

What Happens After You File

Immediate Impact

Once you file Form 1099-MISC with the IRS and provide copies to recipients, the IRS enters this information into their system. Recipients use their copy to prepare their tax returns, reporting the income you paid them. The IRS matches what you reported against what recipients report—any discrepancies trigger automated notices.

For Recipients

Independent contractors and service providers must report the income shown on Form 1099-MISC on their tax returns (typically Schedule C for sole proprietors). Amounts reported in Box 7 are generally subject to self-employment tax (Social Security and Medicare taxes), which is about 15.3% of net earnings.

IRS Matching Program

The IRS runs sophisticated computer programs that match every Form 1099-MISC against individual tax returns. If someone doesn't report income that you reported paying them, they'll receive an IRS notice (CP2000) proposing additional tax, penalties, and interest. If you don't file a required 1099-MISC, you may receive a penalty notice.

Potential Audit Flags

Inconsistencies between your Forms 1099-MISC and your business tax deductions can flag your return for audit. For example, if you deduct $50,000 in contract labor but only issue $20,000 in 1099-MISC forms, the IRS may inquire about the discrepancy.

State Reporting

Many states require copies of Forms 1099-MISC or have their own reporting requirements. After filing with the IRS, check your state tax department's requirements to ensure compliance.

Record Retention

Keep copies of all Forms 1099-MISC, supporting documentation, and Form W-9s for at least three years from the due date of the return (four years if backup withholding was involved). The IRS can request these during audits.

FAQs

Q1: I hired someone who did less than $600 of work. Do I still need to issue a 1099-MISC?

No. The $600 threshold is cumulative for the entire year. If total payments to that person during 2012 were less than $600, you're not required to file Form 1099-MISC. However, you should still keep good records of all payments for your own bookkeeping and tax deduction purposes.

Q2: What if my contractor refuses to provide a W-9 or Social Security Number?

You have two options: (1) Don't pay them until they comply, or (2) Start backup withholding at 28% of all payments and send those withholdings to the IRS. Report the payments and withholding on Form 1099-MISC, using the person's name and address without a TIN. This protects you from penalties, though the contractor faces difficulties when filing their tax return without proper TIN reporting.

Q3: I paid my landlord rent for my business office. Do I need to issue a 1099-MISC?

Yes, if you paid $600 or more in rent during 2012, you must file Form 1099-MISC reporting the rent in Box 1—unless you paid a real estate agent who then forwarded the rent to the landlord. In that case, the agent must issue the 1099-MISC to the property owner, not you. Also, if your landlord is a corporation, you generally must still report rent payments (the corporate exception doesn't apply to rents).

Q4: Can I just give my contractor a handwritten 1099-MISC?

No. You must use official IRS forms (ordered from the IRS or printed by an approved vendor) or approved tax preparation software. The IRS scans Copy A using optical character recognition equipment, so forms must meet strict specifications. Handwritten entries are acceptable for information (names, addresses, amounts), but they must be clearly legible. Photocopies are never acceptable for Copy A sent to the IRS.

Q5: I made payments to an LLC. Do I need to issue a 1099-MISC?

It depends on how the LLC is taxed. Check their Form W-9. If the LLC is taxed as a corporation (C-Corp or S-Corp), you generally don't need to issue a 1099-MISC (except for the attorney and medical services exceptions). If it's a single-member LLC taxed as a sole proprietorship or a multi-member LLC taxed as a partnership, you must issue a 1099-MISC if payments totaled $600 or more.

Q6: What penalties apply if I file late or incorrectly?

Penalties vary based on how late you file: $30 per form if corrected within 30 days; $60 per form if corrected by August 1; $100 per form if corrected after August 1 or not filed at all. Maximum penalties apply per year: $500,000 for larger businesses, $75,000 for small businesses. Intentional disregard of filing requirements results in penalties of at least $250 per form with no maximum. However, reasonable cause (not willful neglect) can reduce or eliminate penalties.

Q7: Do I need separate forms for different types of payments to the same person?

No. If you paid the same person for multiple types of services during 2012, you can report all payments on a single Form 1099-MISC, with amounts shown in the appropriate boxes. For example, if you paid a contractor $3,000 in consulting fees (Box 7) and $2,000 in rent for equipment (Box 1), report both amounts on one form.

This guide provides general information based on 2012 tax year rules. For specific situations, consult the official IRS instructions or a qualified tax professional.