1099-MISC Means Anything But Ordinary

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:

Senders

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.

Recipients

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.

To All

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.

Comments

[Chris]

TP, I thought the threshold on paying taxes on contract income was something like $4000? Is this an incorrect assumption?

[Ryan Ellis]

All contract income is taxable. You are allowed to deduct ordinary and necessary business expenses from contract income. In lieu of listing actual expenses, the IRS allows you to deduct the lesser of $5000 or your business expenses. This is not allowed for those with inventories, accrual-method taxpayers, home office deducters, or asset depreciators.

[Tracy]

TP...I work as a contractor. I bill the company for my wages and they pay me a "perdiem" of $110 a day to cover travel expenses. However, my 1099 includes all $ received. Do I have to show it all as income? Shouldn't it only show my "wages"?

[John Rose]

I receive Social Security and a pension from my employer...I have the chance to play in an oldies band that issues form 1099 to its members at the end of the year (the band is incorporated), but am afraid that if I receive one I'm going to have to reimburse Social Security alot of money that I can't afford to pay. Please advise whether I can/should do this or not. I'm 100% disabled, medically...and would be using my hobby to make only a few dollars per month doing this, not thousands like a rock star (far from it). Thanx

[AB]

I work for a large non-profit, comprised of members from around North America. At our annual convention delegate/members will be recieving gifts valued at just north of $600. My quesiton is: does this gift giving trigger a 1099-misc reporting obligation? I would think not, since the gifts are not given to employees, nor contractors; are not in exchange for services, as compensaiton or bonuses, but are given freely to already existing members of the organizaiton. Any suggestion for what part of the code addresses this? Instrucitons for 1099-misc do not help much. -thank you, AB

[Justin]

I received a 1099 MISC and after calculating with Turbo Tax, it looks like the federal tax is north of 35% total! Is this correct?

[Justin]

I received a 1099 MISC and after calculating with Turbo Tax, it looks like the federal tax is north of 35% total! Is this correct?

[Nate]

I received a 1099-MISC from a business where I setup their computer network. Can I deduct expenses then like my internet? I can remotely access the fileserver I built over the net if they have future problems. I don't have a business but I do side work like this once in a while.

[warren]

I received a 1099 Misc with nonemployee comp of $8,000.00. I do catering for private parties and drive to different locations for each party. Can I deduct 100% of the mileage from my house to each of these locations?

[Betty]

I have my employer's Tax ID Number, but can't get anyone there to send me another 1099 MISC to replace the one I lost. I filed a late extension for the 2007 taxes and need this to file. Any idea how I cn get one without the cooperation of my former employer?

[Betty]

I have my employer's Tax ID Number, but can't get anyone there to send me another 1099 MISC to replace the one I lost. I filed a late extension for the 2007 taxes and need this to file. Any idea how I cn get one without the cooperation of my former employer?

[Whitney]

I was wondering what my tax bracket would be if I won prizes on a TV show totaling 55,894.00. I understand that I must fill out a 1099 MISC form, but I was wanting to know how much I was going to have to end up paying in 2009 for my 2008 State and Federal income taxes. Thanks!