Q: Tax Playa, I hired a kid to do $1000 of research for me and need to deduct it off my taxes. How do I account for this properly?
Chris, Providence RI
Q: Tax Playa, I did some work for a researcher last year, and got $1000 for my efforts. He just sent me a 1099-MISC. What do I do with it, and how do I pay taxes on it?
Henry, Washington DC
A: Anyone hiring a person or unincorporated business for more than $600 in a year must issue a 1099-MISC, which reports that money to the IRS. Recipients of 1099-MISC income must pay both income and self-employment tax on this money...
There are a whole series of 1099 documents. Most are familiar with 1099-INTs that report interest, but there are a host of others.
The 1099-MISC is a catch-all. It is used for rent and a few other cats and dogs. Most people, though, receive 1099s for "non-employee compensation," otherwise known as "contract income."
Confused by 1099s? Let's break down the discussion into senders and recipients of the documents:
You are required to issue a 1099-MISC by January 31st to any person or unincorporated business whom you paid a cumulative $600 or more in the prior year. These payments are for trades and services performed (writers, researchers, etc.) If you have an employee-employer relationship with the person, a 1099-MISC is not the appropriate document to send out.
You must send the IRS their copies of the 1099-MISC (along with a summary 1096) by February 28th.
Once this is done, you should feel free to deduct the cost of these services where appropriate.
If you receive a 1099-MISC for non-employee compensation, this is considered self-employment income. You are required to pay income tax and self-employment tax on this money, the latter of which can run as high as 15%.
That's the bad news.
The good news is that this is business income. As such, you can deduct all ordinary and necessary business expenses off this income, and need only pay tax on the difference. Also, you can deduct half your self-employment tax against ordinary income, as well as health insurance premiums and a retirement plan contribution.
Don't make the mistake of reporting this as "other income" on Line 21. It isn't. It's business income, plain and simple.
The bottom line, whether you are issuing or receiving 1099-MISCs, is to enlist the services of someone who knows what they are talking about.