The 1099 Miscellaneous form is provided at the end of the tax year for both self-employed individuals and independent contractors. Box 7 on the form is the one that is used most for the self-employed and independent contractors. There are specific rules regarding the use of Box 7.
How Does the IRS Define Non-Employee Compensation?
The IRS uses a four-fold test to determine whether payments made were to be considered non-employee compensation. First, this payment is being made to someone who is not your employee. If the person you paid was an employee, the amount paid should be included on a W-2 Form. However, some companies issue bonuses to corporate officers and management and put that amount on a 1099-Misc. Second, the payment is for services done for your trade or business. This would include sub-contractors and government agencies. Third, the payment is made to an individual, a partnership, estate or a corporation. Fourth, the payments made are more than $600 for the entire tax year.
Box 7 and Self Employment Tax
Amounts reported in Box 7 are subject to the 15.3 percent self-employment taxes. This is made up of the Social Security and Medicare tax contributions that should be paid during the year using the 1040-ES for paying estimated taxes on a quarterly basis. A self-employed person must pay both the employee and employer contributions. Any payments not subject to the self-employment tax and that don't fit anywhere else on the 1099-Misc must be put in Box 3.
Types of Payments Reported in Box 7
The IRS Publication, Instructions for Form 1099-Misc. lists these types of payments reported in Box 7. These include professional service fees for attorneys and accountants; fees paid from one professional to another including referral fees; payments by attorneys for witnesses or experts to testify in court; payments for services or parts and materials used to perform the services; commissions paid to non-employee sales persons who are subject to repayment but not repaid; and any payment over $600 made to a non-employee, including travel reimbursements; payments to entertainers for services. The exchanges of services with value between individuals also should be reported in Box 7. For example, if a plumber trades $800 of plumbing work for $800 of work from a carpenter, each must issue a 1099 for the $800 of services rendered.
Box 7 and Section 409A Income
Section 409A applies to any compensation earned in one year, but not paid until the following year. This is known as deferred income. Originally, the idea behind deferred income was to put off the payments on taxes for income that although it was earned, had not been paid. In 2005, Section 409A was enacted that makes income earned taxable, even if it has not been paid. This is called nonqualified deferred compensation. Some income is possible to defer until later through use of a 401(k) plan or a section 403(b) or 457(b) plan.
Box 7 and Golden Parachute Payments
A "Golden Parachute" is a lump sum payment given to a corporate executive to leave the company. Any Golden Parachute payment needs to be included in Box 7 of the 1099-Misc. To qualify as a 'Golden Parachute' payment the payment must meet four conditions. First, the payment must be compensation. Second, the payment is made to a disqualified individual. In other words, someone who at some time in the 12-month period prior to the date of separation from the company, was considered an employee, officer or independent contractor for the company he is leaving. Third, the payment is made because there has been or will be a change in ownership or control of the corporation. And fourth, the payment made must be at least three times the individual's base amount of pay.
Box 7 and the Independent Contractor
For any independent contractor, any amount over $600 for the tax year should be included in Box 7 of the 1099-Misc. If the independent contractor is receiving a Golden Parachute that is in excess of the three times his base pay, he may have to use Box 13 of the 1099-Misc.
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