The tax laws requiring the issuance of a form 1099-MISC to independent contractors earning payments in excess of $600 in a calendar year apply only to businesses, as do tax deductions related to the payments. However, individuals engaging workers for the performance of services may face other reporting requirements, while individuals who receive the 1099-MISC for earning income may be eligible for deductions or adjustments to gross income.
The 1099-MISC form allows for the reporting of numerous types of miscellaneous income that is differentiated from wages earned by the lack of a formal employer-employee relationship. The form requires the listing of both the payer and recipient's name, address and taxpayer identification number along with the total income received. In many instances, the 1099-MISC reports non-employee compensation paid out to individual independent contractors or other businesses, but it also features spaces for rents, royalties, attorney payments and other income.
Independent contractors who receive the 1099-MISC to report non-employee compensation are able to claim tax deductions for expenses incurred to earn the income. IRS form Schedule C allows sole proprietors to report both expenses and income and claim a profit or loss which is then reported on Form 1040, U.S. Individual Income Tax Return. However, certain types of income reported on the 1099-MISC may not allow for tax deductions. For example, royalties earned from book sales are not considered self-employment income if you are not a writer by trade. The royalty income reported on your 1099-MISC form would not be eligible for any tax deductions. Similarly, the winning of a sweepstakes prize with a cash value in excess of $600 requires the issuance of a 1099-MISC with the value listed as "Other income." In a random drawing, no qualifying expenses would be incurred to enter, therefore no tax deductions would exist.
Adjustment to Gross Income
An adjustment to gross income is not a tax deduction but does reduce an individual's total gross income before tax credits and the standard or itemized deduction are applied. If you are the recipient of a 1099-MISC with income that requires the payment of self-employment taxes, you may deduct half of the self-employment tax paid on Line 27 of Form 1040. This adjustment to your income applies whether or not you were entitled to additional deductions.
Household Employees and Contract Workers
When you engage an individual, such as a plumber or landscaper, to perform a service and let the contractor control how the work is done, you are not required to send the worker a 1099-MISC, even if payments exceed $600, as long as the work is for private, not business, purposes. Instead, the contractor must report the earnings to the IRS. If you do control the execution of the services and create an employer-employee relationship with the worker, do not issue a 1099-MISC. Instead, provide the employee with a form W-2, Wage and Tax Statement, and begin the process of withholding and submitting Social Security, Medicare and income taxes to the IRS on behalf of both your and the employee. The wages paid to a household worker, such as a nanny, maid or gardener, are not tax-deductible.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.