1099-Misc

The IRS Form 1099-MISC is used to report miscellaneous income to nonemployees. And while that sounds simple enough, it does present many challenges to churches and nonprofits. Confusion over what is included, when it is required, and how it should be completed is widespread. This article will present some basic information about the 1099-MISC form to help pull back the veil on this misunderstood and misreported form.

 

According to the IRS, the 1099-MISC form should be used to:

• Report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.
• Report payments of $10 or more in gross royalties or $600 or more in rents or compensation.
•  Report payment information to the IRS and the person or business that received the payment.

Although the 1099-MISC and IRS Form W-2, Wage and Tax Statement, are used to report compensation, these two forms serve different functions. Employers use Form W-2 to report wages, tips, and other compensation paid to an employee, while the 1099-MISC is used to report compensation to nonemployees.

 

In general terms, employers will complete a 1099-MISC for each nonemployee to whom they paid during the year at least $10 in royalties (or broker payments in lieu of dividends or tax-exempt interest) ORat least $600 in:

• Rents
• Services
• Prizes and awards
• Other income payments
• Medical and health care payments
• Payments to an attorney
• Crop insurance proceeds
• Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish

This form is used to report payments made in the course of a trade or business, and this includes churches. As the IRS states, “nonprofit organizations are considered to be  engaged in a trade or business and are subject to these reporting requirements.” However, a 1099-MISC is not required for personal transactions. As an example, a home owner would not need to file a 1099-MISC when paying for plumbing services or lawn care, even though the payment was over $600.

 

Completing the Form

 

Here are some specific instructions on where to report some of the more common types of reportable compensation that churches might encounter (for a complete description of all boxes, see the instructions for Form 1099-MISC):

 

Box 1: Enter amounts of $600 or more for all types of rent payments, including rental for office space (unless paid directly to a real estate agent), and machine rentals, like   bulldozers or backhoes (if part of the fee is for the operator’s labor, include the labor charge in box 7.)

 

Box 2: Enter royalty payments of $10 or more for mineral rights, patents, copyrights, and literary works.

 

Box 3: Enter other income of $600 or more, that is reportable, and not included in any other box. Include prizes and awards that are not for services performed.

 

Tip: Do not include prizes and awards paid to your employees. These should be reported on form W-2.

 

Box 4: Enter backup withholding for persons who have not furnished their TINs to the church.

 

Box 6: This box is for payments made to physicians or other medical care providers for health care services, such as injections, drugs, dentures, and similar items. This might be applicable for churches if you pay a physician to provide flu shots for your employees.

 

Box 7: Enter nonemployee compensation of $600 or more for fees, commissions, prizes, and awards for services performed by nonemployees. Include professional service fees for attorneys (even corporations), accountants, architects, contractors, engineers, etc. Include travel reimbursements for nonemployees if they did not report the expenses in accordance with an accountable reimbursement plan, and taxable fringe benefits for nonemployees (see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits for more info).

 

Tip: According to the IRS, if the following four conditions are met, you must report compensation to nonemployees in box 7 on Form 1099-MISC:

1. The church made a payment to an individual who is not an employee.
2. The church made payment for services in the course of their trade or business (this includes nonprofit organizations).
3. The payments were made to an individual, partnership, estate, or in some cases, a corporation.
4. The payments to the payee were $600 or more during the year.

Box 14: Enter gross proceeds of $600 or more paid to an attorney in connection with legal services.

 

Common Mistakes

 

The following types of compensation do not need to be reported on a 1099-MISC, even though they may result in taxable income to the recipient. However, many churches will make the mistake of reporting these on a Form 1099-MISC when they should be reported on a W-2, or not at all.

 

The following do not need to be reported on a 1099-MISC:

 

• Payments to a corporation (unless for legal fees, as described later).
• Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
• Payments of rent to real estate agents.
• Wages paid to employees.
• Military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services.
• Business travel or auto allowances paid to employees.
• Bonus, prizes, or awards paid to employees.
• Cost of group term life insurance paid on behalf of employees.
• Payments to tax-exempt organizations including tax-exempt trusts (like IRAs, HSAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government.
• Expense reimbursements paid to volunteers of nonprofit organizations.

Special Rules

 

Here are some specific payments that have their own special reporting rules:

 

Payments to Lawyers. There are a few types of payments that must be reported on a Form 1099-MISC, even if they are paid to corporations. This includes payments to attorneys. Attorney fees are reported in box 7 of Form 1099-MISC; other payments for legal services or settlement agreements are reported in box 14 of Form 1099-MISC.

 

Payments to Directors. If you provide your Board of Directors with a stipend or other remuneration, including payments made after retirement, these should be reported in box 7 of Form 1099-MISC. However, reimbursement of travel and other business expenses in accordance with an accountable reimbursement plan are not considered remuneration, and should not be reported.

 

Payments made with Credit Cards. There is a one rule about the 1099-MISC that is easily overlooked and widely misunderstood. According to the IRS instructions, “payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.” Simply stated, if the church pays an independent contractor by credit card, then the payments are not to be reported on a Form 1099-MISC, even if they exceed $600 during the year. That responsibility falls on the credit card company to send a different form, called the 1099-K, Payment Card and Third Party Network Transactions, which has its own set of instructions and reporting rules. (In fact, the “payment settlement entity” only needs to file a 1099-K when the payments exceed $20,000 a year, and there are more than 200 transactions with the payee.)

 

Example. A church contracts with an unincorporated graphic designer to create and design four brochures. Each design will be paid $200 for a total of $800 in one calendar year. The church pays the graphic designer $400 by check, and $400 by credit card. Even though the church paid the graphic designer more than $600 in one year, none of the payments need to be reported on a 1099-MISC since the payments by check did not exceed $600 and the payment by credit card will be the responsibility of the payment settlement entity.

 

Filing Dates

 

It’s important to note that there are different filing dates based on the type of nonemployee compensation being reported. Search for "Filing Dates" on this article for the most up to date information.

 

Copies also need to be sent to the payees which have different reporting dates.