- [Voiceover] There are many different types of 1099s,
some for interest income, some for capital gains,
and many other purposes.
But probably the most common 1099 you'll run into
is the 1099-MISC, or 1099 miscellaneous.
The different types of 1099s track
different types of non-employment income.
Let's take a look at the 1099-MISC.
So this is an example of a 1099-MISC.
Now here's an important point.
This form, which is available online, is a generic one.
You cannot actually use this when you're sending out 1099s.
The reason for that is the IRS
has special 1099 miscellaneous forms
that are coded in a particular way to be machine readable.
Anything you download from online won't be coded properly.
So you have to order 1099 forms from the IRS.
They're free, the IRS will mail them right out to you,
but you can't use them directly downloaded off the internet.
Just a caveat.
Now in the 1099 there's a few key points.
You're going to have to include the payer's name,
street address, address, et cetera.
Notice, that is not the same as the person who gets paid.
So this is where your information goes.
You as an individual or business owner,
this is where your information should go.
Next, below that, you'll need to put in
the payer's tax identification number.
That's your tax identification number.
It should be an EIN, Employment Identification Number.
If you don't have one you can put in your social,
or you'll have to put in your social, I should say,
but ideally you should have the EIN in there.
Next you'll have the recipient's tax ID number.
In most cases, in my experience,
this will probably be their social security number.
You need to collect a social security number
from anybody that you pay money to
as part of a business transaction
other than if they are providing goods, all right?
If they are providing goods to you,
if they're a supplier,
there's generally an exemption on that,
and it varies a little bit over time.
But if you're, as an example, a builder,
and you pay $3000 to a plumber to go and install a bathtub,
you need to send that plumber a 1099 miscellaneous.
If you don't you won't be able to count it as a cost
on your tax returns, or at least you won't be able to
without running the risk of an audit and a nasty tax bill.
So you have to collect tax ID numbers from these people.
They may or may not give you a legitimate tax ID number.
If they don't, the IRS is going to send you a letter later on,
a few months later, in my experience,
and say, hey, this is a dummy ID number.
Doesn't fit with the other information you've included.
You need to begin backup withholding on this individual.
All right?
So in addition to the tax ID number you also have to
include the recipient's name, the street address,
and the city, state, and zip code
for that particular individual.
Make sure you've got all this correct,
otherwise, you're going to have to begin backup withholding.
The IRS doesn't fault you the first time
you get a wrong tax ID number.
But if they tell you to begin backup withholding
and you don't,
then they start to get really ugly
and you may start to face fines or penalties.
Once you've filled out the basic information
you'll need to come over and begin including
any of the money that you've paid
to this particular individual.
The most typical box you're going
to use on a 1099 miscellaneous is box number seven,
non-employee compensation.
Now one thing that I've done personally,
'cause it kind of looks a little deceptive, right?
When you put the non-employee compensation in there,
you need to put it in box seven in the area below
the number seven where it says non-employee compensation.
You can put it in the pink area or the white area,
that's fine.
Don't put it just above the number seven
in that white area right here.
Okay, now the reason you can't put it into
the area right above number seven, where that white area is,
this is for fishing boat proceeds.
Don't ask me why they have a separate box on 1099s
for fishing boat proceeds.
I have no idea.
I don't think we have that many commercial fisherman,
but I personally, early on when operating a business,
did accidentally once write in the non-employee compensation
into the fishing boats proceeds box
thinking that it went above the line.
And then I had to issue a corrected 1099 miscellaneous
a couple of months later before
I could file my own personal taxes.
So don't make that mistake.
Most of the other boxes you probably won't use.
Sometimes when you have rents or royalties,
boxes number one and two, those may get used
if, for example, you help an author publish a book
and you're the one selling the book,
but the author gets royalties off of that.
Or if you have rent on real estate or something similar
those boxes may get used.
But by far, the most common one is box number seven.
You've got to have a 1099 miscellaneous for everybody you pay
an amount over $600 to that provides
a service for your business.
Otherwise, you won't be able to count this
on your expenses in general.
Everybody's tax circumstances are a little bit different,
so you should talk to your accountant,
but that's just a general rule of thumb.
Now you should understand the 1099 miscellaneous
and the different components of it.