The 411 on 1099s
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If you paid $600 or more in rents connected with your writing business, you should report the rents in box 1 of the Form 1099-MISC. This rule applies to both the rental of real estate and rental of items such as business equipment. Note, however, that if you make payments to a real estate agent rather than the owner of the property you do not have to report the payments.
If you pay $600 or more to an independent contractor, such as a website designer, a freelance editor, a publicist, an accountant, or a cover artist, you should report the payment on a 1099-MISC in box 7 as “Nonemployee compensation.” The same rule applies to an independent writer you hire to write cover copy, ad copy, blogs, articles, or other written works as works for hire. Similarly, if you hire a freelance assistant, you would report payments of $600 or more to the assistant in box 7. Be careful, though. If the IRS determines that a person performing services for you is actually an employee rather than an independent contractor, you could find yourself liable for payroll taxes. A discussion on this topic is beyond the scope of this article, but more details can be found by searching the term “worker classification” on the IRS website, www.IRS.gov.
Payments of royalties of $10 or more should be reported in box 2 of the 1099-MISC form. Although whether a payment constitutes a royalty might seem obvious, such may not necessarily be the case. In situations where writers jointly produce a written work, a payment by one author to another might constitute a royalty or it might constitute nonemployee compensation (discussed in the preceding section). If the payment represents compensation in a work-for-hire situation, the payment is not a royalty. If the payment represents the distribution of earnings from the exploitation of a copyright owned, all or in part, by the recipient of the payment, then the payment would constitute a royalty.
If you paid $600 or more for legal services for your writing business in a tax year, you should report the amount paid to the attorney in box 7, even if the payment was made to a corporation. As noted above, although payments to corporations are generally exempt from the reporting requirements, payments made to a corporation for legal services are not exempt. Note that box 14 “Gross proceeds paid to an attorney” is intended for payments in the form of settlements, such as payments made to an attorney in settlement of a copyright infringement suit.
Payees Subject to Backup Withholding
Under certain circumstances, the IRS will require a payer to deduct “backup withholding” from payments made to a third party. The IRS will contact a payer and require backup withholding if a party has failed to pay his or her taxes or if a party has provided an incorrect taxpayer identification number. Additionally, if you hire an independent contractor, pay rent directly to an individual landlord, or pay royalties to a third party and that party has refused or neglected to provide you with their tax identification number, you must deduct backup withholding from the payments you make to that person and remit the withholding to the IRS.
The backup withholding rate at the time this article was written was 28%, effective through the end of 2012. The 2013 rate had not yet been announced. If you must deduct backup withholding from payments, contact the IRS to determine the current backup withholding rate.