For most taxpayers, filing tax forms is hardly straightforward. Form 1099-MISC, especially, includes lots of payments, and keeping track of them can be difficult. In this guide, we’ll look at a common section of the form that’s often hard to understand: Box 6.
By the end of the article, you’ll know the types of payments to report in the section and the ones to exclude. Let’s jump in.
Form 1099-MISC is an IRS form that taxpayers use to report several types of miscellaneous income such as legal fees, rents, awards, royalties, and healthcare payments. The form generally doesn’t cover the purchase of goods or tangible products. In the past, it included nonemployee income, but now such payments are reported in Form 1099-NEC.
The IRS requires payers to send the form to recipients by the end of January and file it by March 1. Recipients, though, don’t have to attach the form when filing their tax returns, as the IRS already receives the form earlier.
To report in Form 1099-MISC, businesses need to have paid via check, ACH transfers, cash, or other direct means. Credit card payments -- or payments through third-party entities -- are excluded, as they fall into Form 1099-K.
Box 6 includes medical and health care payments to nurses, physicians, or hospitals. Fees for both goods and services need to be reported, where taxpayers report the entire payment in box 6.
Goods may include pharmaceutical products such as vaccines and injections; services may include screening and lab services.
Generally, Box 6 comes into play when you satisfy these conditions as a payer:
Corporations often don’t receive Form 1099-MISC. But this is not the case when it comes to healthcare payments (and attorney fees). If you pay at least $600 to either an S corporation or a C corporation, the IRS requires you to report the fees in Box 6.
Note that you need to list the corporation as the recipient of the income payment rather than the person providing the services, meaning you won’t use a Tax Identification Number.
Payments from insurance firms to medical service providers and physicians are reportable in Box 6. If an insurer makes payments under health, accident, and sickness insurance programs, it needs to report the amounts.
Payments for insurance premiums, though, aren’t reported. Keep in mind that a premium is generally not classified as a “service”. If you buy an insurance policy, you’re not guaranteed to use it. It may come in handy when things go sour, but for the most part, this is not always the case.
So insurance policy payments can’t be considered by the IRS in the same way as drug screening or lab services.
Of course, as with most things concerning taxes, there must be exceptions, and Form 1099 Box 6 is no different. These exceptions include:
In the eyes of the IRS, pharmacies are more ‘retail’ than medical service providers, even though the organization lists them as one. Pharmacies operate like other establishments selling goods, meaning they follow different federal tax guidelines. So if you buy prescription drugs from a pharmacy, you don’t need to provide a Form 1009-MISC.
Nonprofit hospitals offer charity care to underprivileged patients without expecting any pay for their services. For this reason, the IRS considers such hospitals “tax-exempt”, provided they promote their original purpose -- either educational, scientific, religious, or charitable.
The tax-exempt status allows them to provide their charity services without having to pay any federal, local, or state taxes. And the freedom from taxes means they incur much lower costs when treating patients.
Now, if you make any payments to nonprofit hospitals, then you don’t need to record the amounts in box 6. Likewise, with government-owned facilities, you don’t record any payments, as they’re also exempt from taxes.
Box 1 covers payments for renting machinery, office space, work equipment, or even pasture. Payments made need to 1099 contractors to be at least $600 over the course of the year, just like with box 6.
Renting and leasing medical equipment falls in box 1, too. So, if you lease medical beds, defibrillators, or sterilizers, then the payments don't appear in box 6, even though the supplies are for medical purposes.
A health reimbursement arrangement (HRA) is a perk that some businesses offer their workers to cater for their medical expenses. Employers set up the arrangement and decide the amount to set aside for the plan.
Workers can then request to be reimbursed for their health care expenses up to the limit set by the employer. Remember that reimbursements are typically tax-free if they’re used for qualified healthcare expenses.
Similar to HRAs, flexible spending accounts are also set up by employers for workers. Workers contribute a percentage of their regular earnings, and sometimes employees can also chip in.
FSAs offer huge tax perks, as they help workers reduce their tax liabilities. Because the money used to fund the arrangement is deducted from your paycheck before taxes, you save whatever percentage of the money you’d have paid in taxes.
HRA and FSA funds can help you buy medical supplies, prescription medications, and over-the-counter drugs. Medical payments from these funds, however, are excluded from box 6 reporting requirements.
Traditionally, companies used Form 1099-MISC to report payments of at least $600 to 1099 nonemployees -- such as independent contractors and freelancers -- for specific payments made in the course of trade or business. Such payments often represented nonemployee compensation and belonged in 1099-MISC’s box 7.
But due to recent changes from the IRS, reporting of nonemployee compensation has shifted from box 7 in 1099-misc to Form 1099-NEC.
Now the main difference between 1099-NEC and 1099-MISC is that companies only use the latter form to report nonemployee compensation. For other income such as prizes, rent, or royalties, companies need to use Form 1099-MISC.
If you’re an independent contractor, you’ll now receive form 1099-MISC to report income received that’s not subject to self-employment tax.
That said, even with the new form-1099-NEC, medical and health care payments still belong in box 6 of form-1099-MISC.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?