Form 1099-MISC has wide and varied uses. From specified income payments to crop insurance proceeds, this form is a catch-all for most forms of non-employment compensation. The IRS has announced that the 1099-NEC is going to be available in the very near future. This means contracted income will have its own form, which will help streamline some of the 1099-MISC process. But even with the introduction of this new form, the 1099 gift question remains. Should you issue a 1099 if you provide a gift? In short: It’s complicated. Our fuller explanation is written below.
The Difference Between a Gift and a Prize
Your business’s obligation to issue a 1099 form will depend on how the “gift” was distributed. A lot of businesses use promotional giveaways and contests to market a rebranding or new service. If the item your business purchases for one of these prizes or giveaways is more than $600, you will need to collect a W-9 and distribute a 1099 at the end of the year. If, on the other hand, your business decides to give away an item that costs more than $600 – specifically something that is not won or promotional – you will not need to distribute a 1099. The difference? What constitutes a “gift” versus what constitutes a “prize.”
Promotional giveaways, awards, and prizes are all listed as reasons to distribute a 1099 form. Gifts are not. We’re not completely sure why this designation exits, but we have a feeling it has to do with the difference between an earned commodity, such as an award, and a charitable commodity, such as a gift. So, if your business entity distributes a cash reward of more than $600 each year, you’ll need to issue a 1099 to the recipient. If your business decides to give $600 to a client for no reason – we’re not sure why – you won’t need to distribute a 1099 form.
1099 Gift vs. Gift Tax
There are, however, some gifts that will need to be reported and taxed. Cash gifts can be subject to tax rates that range from 18 percent to 40 percent, depending on the size. The tax is paid by the person or entity providing the gift, but most people avoid the gift tax.
Here’s why: Cash gifts of up to $15,000 per year do not need to be reported. For 2020, the IRS ruled that gifts made to pay school tuition or medical bills are excluded, but to be eligible for the exclusion, they must be paid directly to the school or health care provider. Gifts more than $15,000 need to be reported with a Form 709 filing.
Preparing for 1099 Filings with Advanced Micro Solutions
Whether your business distributes prizes or gifts, you’ll likely need to send out a few 1099 forms at the end of the tax year. Don’t spent time searching “1099 gift” when you can have a software suite with answers at your fingertips. Choosing a semi-automated software tool, like those offered from Advanced Micro Systems, can help clear the way for easy and accurate accounting. We’ll help you complete, file, and distribute any number of 1099 and W-2 forms each year. Plus, AMS Payroll, our payroll solution, can help you keep track of prizes, gifts, and distributed wages, making for easy monthly, quarterly, and end-of-year filing.