The money you dole out at your business doesn’t just go toward employee wages. You might hire an independent contractor or attorney to do work for your company. Or, you might make rental payments for office space. When you make payments like these, you need to report them as miscellaneous income. What is miscellaneous income?
What is miscellaneous income?
Miscellaneous income is any income received outside of typical employee wages. These payments are not reported on Form W-2.
Generally, you might think nonemployee compensation is the only type of miscellaneous income. But, there are many other forms of payment that are considered IRS miscellaneous income. Take a look at some miscellaneous income examples:
- Rent payments: If you rent a physical location for your business and you do not pay a real estate agent, the payments are considered miscellaneous income.
- Royalties: Payments made to someone for the use of property, like patents, are considered miscellaneous income. For example, if you are a franchisee, you pay royalties to the franchisor.
- Nonemployee compensation: When you hire a worker and determine they are not an employee, they are an independent contractor. Do not take taxes out of wages paid to an independent contractor since the person is not one of your employees—they must pay independent contractor taxes on their own.
- Prizes and awards: Money you pay in prizes and awards for independent contractor services, or prizes and awards that are not for services performed (i.e., sweepstakes) are miscellaneous income.
- Other income payments: This type of miscellaneous income can include prizes and awards or any other type of required reporting, like a deceased employee’s wages paid to a beneficiary.
- Medical and health care payments: If you offer benefits at your business and pay health care providers for health, accident, and sickness insurance programs, it is miscellaneous income.
- Crop insurance proceeds: If you are a farmer, rancher, or operate a similar business, you might have crop insurance. Payments to insurance companies for crop insurance are considered miscellaneous income.
- Cash payments for fish: If you purchased fish with cash from someone who catches fish for their business, it is miscellaneous income.
- Payments made to an attorney: Payments made to an attorney hired for your business are included as miscellaneous income.
How to report miscellaneous income
As a business owner, you must report miscellaneous income you have paid on the 1099-MISC tax form. On Form 1099-MISC, include the amount you paid for each type of miscellaneous income that exceeds $600. If you paid royalties, report amounts over $10.
You will enter information like the name, address, and identification number of the person you made the payment to on Form 1099-MISC. And, you must include your information. Then, you will enter the amount of miscellaneous income in the appropriate box.
Miscellaneous income is categorized by box:
|Box 3||Other income|
|Box 4||Federal income tax withheld|
|Box 5||Fishing boat proceeds|
|Box 6||Medical and health care payments|
|Box 7||Nonemployee Compensation|
|Box 8||Substitute payments in lieu of dividends or interest|
|Box 9||Payer made direct sales of $5,000 or more of consumer products to a buyer for resale|
|Box 10||Crop insurance proceeds|
|Box 13||Excess golden parachute payments|
|Box 14||Gross proceeds paid to an attorney|
For example, if you paid $5,500 in rent, you will write that amount in Box 1. Maybe, you also paid $10,000 to an independent contractor. You will fill out another Form 1099-MISC and write $10,000 in Box 7.
After reporting miscellaneous income on Form 1099-MISC, you must distribute it to the appropriate parties:
- Copy A: IRS
- Copy 1: State tax department (if applicable)
- Copy B: Recipient
- Copy 2: Recipient (to be filed with their state income tax return)
- Copy C: Your records
Individuals receiving Form 1099-MISC use it to report their miscellaneous income earnings on their federal tax returns. Along with the above examples of miscellaneous income, people must also report gambling proceeds and barter exchanges.
Is miscellaneous income taxable?
Yes, there is tax on miscellaneous income. For example, you pay wages to an independent contractor. You do not take taxes out of the money. But, that individual owes self-employment tax.
Does your business ever hire independent contractors? Do you make purchases from vendors? Patriot’s online 1099 software lets you easily pay your contractors and vendors. And, you can print as many Form 1099s as you need. Get your free trial today!
This article has been updated from its original publish date of July 17, 2013.
This is not intended as legal advice; for more information, please click here.