This Week's LessonWeek of October 21
This lesson focuses on the issue of Completing Form 1099-MISC. You can review the Executive Summary to obtain the key points or read the Weekly Lesson for a more thorough presentation of this topic. Start by completing the following interactive quiz to test your knowledge.
A church has two full-time pastors and three full-time lay employees. It also has two part-time custodians. Should these workers be treated as employees or self-employed by the church treasurer?
Instructions Click on the correct answer for each of the following questions.
Church treasurers must issue a Form 1099-MISC to every "non-employee" who is paid compensation of at least $600 during the year. In this week's lesson, we will review this important reporting requirement.
As a church treasurer, it is your responsibility to issue a Form 1099-MISC to every self-employed worker who was paid at least $600 in annual compensation. In this week's lesson, we will address this important task in detail.
The income tax regulations specify that "every person engaged in a trade or business" shall issue a Form 1099-MISC "for each calendar year with respect to payments made by him during the calendar year in the course of his trade or business to another person" of compensation of $600 or more. In other words, a church must issue a Form 1099-MISC to a person only if the following requirements are satisfied: (1) the church is "engaged in a trade or business"; (2) the church pays a self-employed person (a non-employee) compensation of $600 or more during the calendar year; (3) the payment is in the course of the church's "trade or business"; and (4) no exception exists. Each of these requirements will be briefly reviewed, along with tips on completing the form itself.
(1) the church engaged in a trade or business
The tax regulations specify that the term "person engaged in a trade or business" includes not only "those so engaged for gain or profit, but also organizations the activities of which are not for the purpose of gain or profit" including organizations exempt from federal income tax under section 501(c)(3) of the tax code. This includes churches and other religious organizations.
(2) annual compensation of $600 or more paid to a "non-employee"
A church should issue a Form 1099-MISC to any person to whom it pays $600 or more in a year in the form of self-employment earnings. Self-employment earnings include compensation paid to any individual other than an employee. Examples include ministers who report their income as self-employed for income tax reporting purposes, some part-time custodians, and certain self-employed persons who perform miscellaneous services for the church (plumbers, carpenters, lawn maintenance, etc.) who are not incorporated. Exceptions apply, and they are discussed later in this section. Churches also must issue a 1099-MISC to a self-employed person who is paid in property other than money.
As noted above, churches need not issue a person a Form 1099-MISC form unless the individual is paid $600 or more in compensation. There is no need to issue a Form 1099-MISC to persons paid less than $600 in self-employment earnings during the year. In addition, since reimbursements under an accountable business expense reimbursement arrangement are not included in the reportable income of self-employed persons, such reimbursements need not be considered in computing the $600 figure. An accountable reimbursement arrangement is one that reimburses only those expenses that are substantiated as to amount, date, place, and business purpose no less often than every 60 days, and that requires excess reimbursements to be returned to the employer within 120 days. Similarly, a portion of a minister's income that is designated as a housing allowance is not reportable as income, and need not be taken into account in computing the $600 amount.
(3) compensation is paid in the course of the church's trade or business
This simply means that the self-employed worker is compensated for services performed in the course of the church's normal operations.
The income tax regulations specify that no Form 1099-MISC is required with respect to various kinds of payments, including the following:
- Payments of income required to be reported on Forms W-2 or 941. This means that a church should not issue a Form 1099-MISC to any worker who is treated as an employee for income tax and payroll tax reporting purposes.
- Payments to a corporation. Let's say that a church purchases supplies or equipment from a local business, or hires a local landscaping company to maintain the church grounds. In either case, there is no need for the church to issue a Form 1099-MISC if the company is a corporation. Note, however, that this exception only applies to corporations—and not to partnerships.
- Payments of bills for merchandise, telegrams, telephone, freight, storage, and similar charges. According to this exception, a church need not issue a Form 1099-MISC to the telephone company, UPS, or to vendors from which it purchases merchandise.
- The forgiveness or cancellation of a debt represents taxable income to the debtor. However, the instructions to Form 1099-MISC specifies that "a canceled debt is not reportable on Form 1099-MISC." The instructions clarify that only "financial institutions" are required to report a canceled debt as income, and this is done on Form 1099-C. Of course, if the debtor is an employee, the forgiven debt represents taxable income that should be added to the debtor's compensation that is reported by the church on Form W-2.
- A church is not required to issue a Form 1099-MISC to recipients of benevolence distributions since this form is issued only to non-employees who receive compensation of $600 or more from the church during the year. To the extent that benevolence distributions to a particular individual represent a legitimate charitable distribution by the church (consistent with its exempt purposes) then no 1099 would be required. It would be unrealistic to characterize such distributions as compensation for services rendered when in fact the individual performed no services whatever for the church.
Completing the Form 1099-MISC
A Form 1099-MISC is easy to complete. A church (the "payer") should list its name, street address (no post office box numbers), and employer identification number on the form, as well as the name, address, and Social Security number (or other tax identification number) of the recipient. There are 12 numbered boxes on the Form 1099-MISC. The key boxes are numbers 1, 4, and 7. Let's look at these individually.
- Box 1. Report in this box amounts paid to recipients for all types of "rents," such as real estate rentals paid for office space, machine rentals, and equipment rentals (e.g., hiring a bulldozer to clear land for a parking lot).
- Box 4. Report in this box "backup withholding"—which is explained later in this lesson.
- Box 7. This is the most important box, since it reports all "non-employee compensation." This box contains the compensation paid to a non-employee (i.e., a self-employed person) in the course of the payer's "trade or business." For example, if Pastor G is the senior minister at First Church, and reports his federal income taxes as a self-employed person, then the church reports his compensation in this box. And, if the church is required to issue a Form 1099-MISC to a contractor or other self-employed person who performs services on behalf of the church, the church reports the compensation in this box.
Be sure to add cents to all amounts. Make all dollar entries without a dollar sign and comma, but with a decimal point and cents. For example, $1,000 should read "1000.00." Government scanning equipment assumes that the last 2 figures of any amount are cents. If you report $40,000 of income as "40000," the scanning equipment would interpret this as 400.00 ($400)!
Federal law requires that the Form 1099-MISC be completed and submitted to the recipient of non-employee compensation on or before January 31st of the following year. By the last day of February of the following year, a church must transmit to the IRS a copy of each Form 1099-MISC that it issued for the prior year along with a transmittal Form 1096.
If you issue a Form 1099-MISC with incorrect information, you should issue a corrected 1099-MISC. Assuming that the mistake is noticed after all 1099 forms have been submitted to the IRS (along with Form 1096), the church should (1) prepare a new Form 1096 (transmittal form), entering an "X" in the box labeled "corrected" at the very top of the form, and complete the remainder of the form as appropriate; and (2) prepare a new Form 1099-MISC, entering an "X" in the box labeled "corrected" at the top of the form, and enter the correct information regarding the name, address, and identification number of the church and the recipient exactly as it appeared on the original form, but reporting the correct dollar amount in box 7 as it should have appeared on the original form. Do not include copies of the original Form 1099-MISC (that was filed incorrectly).