In the United States, business entities and individuals who pay others for work performed or professional services rendered have a few options available when it comes to reporting payments made throughout the year. The two most common forms promulgated by the Internal Revenue Service (IRS) are the W-2 and the 1099. The latter is part of a series of forms that can be used for various reporting purposes.
There are three 1099 forms widely used by the financial industry to report funds paid to individuals or business entities. The 1099-C is used by banks, credit unions and other money lenders that receive funds intended to satisfy a debt. When a loan is settled, this form provides information on the taxable gain in favor of the borrower, and it must also be reported to the IRS.
The 1099-INT, 1099-DIV and 1099-R forms are respectively used by public companies, investment banking firms and pension fund managers to report interest accrued, dividend payments made and funds withdrawn from retirement accounts as distributions.
Individuals and Business Entities
The 1099 form that most people are familiar with is the 1099-MISC. Virtually any type of income that is not reported on a form W-2 can be reported on a 1099-MISC. Examples of the types of income that can be reported include:
– Payments made to doctors and lawyers
– Profits from gambling and lotteries
– Payments made to contractors
– Royalties received from the use of intellectual property such as books and films
There are two situations that trigger the 1099-MISC requirement in any given year. For royalties, the trigger is $10; for all other types of income, the amount is $600 per each individual or business entity. For example, a taxpayer who pays an attorney $1,000 for his or her services on a small claims case would be required to file a 1099-MISC. It does not matter if the amount was settled in five separate payments of $200; the filing requirement begins once $600 or more has been paid.
The obligation to file 1099-MISC forms falls on the individual or business making the payments, who can in turn use the forms to claim deduction on his or her annual filing to the IRS. Some contractors and professionals who receive payments on a regular basis will offer their assistance in this regard, but they are not required to do so.