What Are The Differences Between Form 1099 MISC Vs 1099 NEC?
By Davis Clarkson , June 21 2021
The Key Difference Between 1099 MISC vs 1099 NEC
Form 1099 MISC
Form 1099 NEC
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Being self-employed comes with lots of fringe benefits. However, when tax time comes around, things may get somewhat confusing, especially if you don't know the difference between 1099 MISC vs 1099 NEC. And that is where you may have some challenges. Depending on how you are paid, you may get form 1099 MISC or 1099 NEC. But what is the difference between these forms?
What do you need to know about 1099 MISC income vs 1099 NEC? Before 2020, business owners or entrepreneurs used a single universal form, i.e., Form 1099 MISC, to report other types of payments – e.g., rent, etc. – as well as non-employee compensation. However, Form 1099-NEC made a return in 2020 after a 38-year hiatus along with a new filing requirement.
But you might be wondering, “Which of these forms should I fill: form 1099 MISC or 1099 NEC?” Read on to learn more about the 1099 MISC vs 1099 NEC difference and which one you should use.
1099 MISC vs 1099 NEC: Need To Know Information
If you pay vendors or contractors, it is highly essential to know the significant differences between 1099 MISC vs 1099 NEC. When you do, you will fill out, distribute, and file the correct form. Let's start with Form 1099-NEC (non-employee compensation).
Form 1099-NEC: What Is It?
Form 1099-NEC refers to the informational tax form used for reporting non-employee compensation of up to $600 – or even more – that was paid via direct deposit or check within a calendar year. The supposedly brand-new 1099 NEC is really all that new. The last time it was used was in 1982 until the IRS reintroduced the form this year.
The Form 1099 NEC is an exclusive form that business taxpayers will use to report all payments made to independent contractors or self-employed professionals, starting from 2020, the tax year. This shows that Form 1099 NEC replaces 'Box 7' on Form 1099 MISC, which was where clients previously used to report payment for every non-employee compensation.
If a client pays over $600 to a non-employee within a calendar year, they have no choice but to use Form 1099 NEC to report that payment. You will also be responsible for several things:
File Copy A of Form 1099 NEC with the agency – i.e., IRS – by January 31st or the next non-holiday or non-weekend business day. You can file it electronically through the IRS FIRE (Filing Information Returns Electronically) System or mail it to the local Department Treasury Internal Revenue Service Center.
You must have a service provider or software to help you create the file in the right or proper format. This is because a PDF or scanned copy will not be accepted. Bear in mind that if you decide to mail a physical copy, you will also need to file Form 1096, which is designed to track each physical 1099 you have filed.
Send Copy B to your contractor on or by January 31st or the following non-holiday business day. This allows the contractor to report the amount on their tax return.
Send a copy to your state or the states where your contractor works or resides, that is, if they require a copy. However, 1099 NEC is not part of the IRS 1099 Combined Federal/State Filing Program.
This means that the IRS will not send it to the states that participate actively in the program automatically. You can't download Form 1099 NEC online. However, you may order forms from the IRS website. You can also file online using the FIRE System.
What Is The Reason Behind This Significant Change?
Before laying out the reason behind the form 1099 MISC or 1099 NEC change, here's a brief history or background: the deadline for filing all non-employee forms – including the 1099 MISC – was February, i.e., for paper filing. And March 31st for electronic filing. This was before 2015. In the meantime, Form W-2, which is used for reporting employee compensation, was due on January 31st.
This profound gap between deadlines implied that taxpayers could easily file taxes and even get tax refunds right before the IRS receives a report about the taxpayers’ non-employee income forms. And of course, you can guess the outcome: taxpayers reported much lower compensation than what was actually earned. When 2015 rolled in, the IRS decided to reenact the PATH (Protecting Americans from Tax Hikes) Act.
Under this act, all underreporting problems were resolved by moving the deadline for filers to easily report non-employee compensation to January 31st. This way, it was conveniently aligned with the deadline for Form W-2. But then, other business payments – such as rent, etc. – were somewhat stuck on the previous deadlines of February 28th or March 31st. T
his misalignment, in turn, implied that employers had no choice but to issue several 1099 MISC forms, many of them in different deadlines. This made the IRS, business owners, taxpayers, and everyone involved extremely perplexed. Eventually, in 2020, the IRS had to stop the perplexity and bring back the Form 1099 NEC again. This form is to be used only for reporting non-employee compensation payments.
Who Needs A Form 1099 NEC?
Let's say your business paid a vendor or an independent contractor up to $600 or more within a tax year. This makes you eligible to file Form 1099 NEC. But if this contractor is legally registered as an S corporation or C corporation, there will be no need for a 1099 NEC. Instead, you will find this crucial information on the contractor's Form W-2.
You are not expected to file a Form 1099 NEC for your employees. However, all employees will need to get their hands on a Form W-2 submitted to report wages, other compensations within the year, and tips. And do not mis-classify employees as independent contracts because it attracts significant penalties.
What You Need to File
Since you are the payer, you need to request a Form W-9, which will include the following:
Business name or legal name if applicable
A business entity (sole proprietor, corporation, partnership)
Taxpayer Identification Number (EIN, ITIN, SSN)
The payer's primary responsibility is to file the Form 1099 NEC as the form will readily furnish you with all the necessary information you need to fill out any 1099 form. If you work for a payroll service in order to pay your contractors, they will be saddled with the responsibility of filing and mailing 1099 forms for each contractor. Your only input will be their Form W-9.
Ensure you check out your bookkeeping records and confirm the total amount paid to every contractor within the tax year. This is the information you will use to finish filling the Form 1099 NEC.
Penalties For Missing A Filing Deadline
If something happens and you miss a deadline, you may have to pay a penalty. But this depends primarily on how late the payment is. Here are the penalties:
If you file within 30 days, you pay $50
If you file before August 1st and more than 30 days late, you will be mandated to pay up to $100
If you file on or after August 1, you will pay up to $260
The amount you pay will need to be determined, based on precisely when you file the correct information return. But if you can’t file on time, you can request an extension via the submission of Form 8809. But then, you will still be required to supply the 1099 NEC form to any independent contractors by January 31st.
1099 MISC Vs 1099 NEC: States That Do Not Require 1099 Forms
A few states demand that you file 1099 forms with them. But these states don’t require the submission of 1099 forms:
· New York
· New Hampshire
· South Dakota
Some states get involved in programs that require the IRS to forward relevant forms, especially if they are electronically filed. Therefore, consult your CPA in order to be sure that you are fully compliant with your state’s 1099 filing requirements.
Form 1099 MISC: What Is It?
Form 1099 MISC refers to an informational tax form generally used for reporting miscellaneous expenses and income. Users can report multiple payments using 1099 MISC. This includes:
Awards and prizes
Broker payments or royalties
Healthcare and medical payments
Crop insurance proceeds
Payments to attorneys for legal services
Nonqualified deferred compensation
Section 409A deferrals
Fishing boat proceeds
Have you ever paid independent contractors over $600 within a calendar year? Then you may recall Form 1099 as that form you used previously for reporting those payments. But since 2020 is the tax year, the IRS requires you – and other business owners – to report most non-employee compensation. This can be done via Form 1099 NEC. So don't use Form 1099 MISC for W-2 employees.
Who Needs A Form 1099 MISC?
To know whether or not you need to fill out Form 1099 MISC, ensure you understand the following:
How the payee was paid: If you paid a vendor or individual via debit card, credit card, or even a third-party payment settlement platform such as PayPal, you don’t need to report such payments via 1099 MISC.
Instead, the third-party network or card issuer is probably responsible for issuing a Form 1099-K.
What you paid the payee For: If you paid a contractor or vendor or any other independent business entity a minimum of $600 for their services in a calendar year via check, cash, or direct deposit, you might not need to submit that report via 1099 MISC.
Instead, you are much more likely to issue Form 1099 NEC. But if you want to report several miscellaneous expenses – such as attorney fees, medical payments, etc., Form 1099 MISC is an excellent bet.
What type of business entity is the payee: If you had business dealings with another organization in which you made payment for their services, you may not need to issue Form 1099 in order to report those payments. 1099 MISC is not meant for corporations but individuals.
If you have to fill out Form 1099 MISC, bear in mind that the IRS had rearranged more than a few box numbers on the form when the bureau reintroduced 1099-NEC. Nevertheless, you can check the latest version of 1099 MISC. You must send one copy of 1099 MISC to the payee on or by January 31st. You can also send it on the following non-holiday business day and then file Form 1099 MISC with the IRS by March.
Filing by paper requires postmarking by March 1st, but the deadline if you file electronically is March 31st.
So, what is the 1099 MISC vs 1099 NEC difference? The answer to 1099 MISC vs 1099 NEC is 'non-employment compensation.' By instituting the new 1099-NEC, the IRS would easily streamline income reporting for every self-employed person. When looking for new gigs and jobs, as a self-employed person, you might also want to equip yourself with some knowledge of salary negotiation beforehand.
Every month, you need to keep a record of your income stream. This is when the paystub generator comes in handy and saves you time with its automated process. Hopefully, the next time you have to deal with the IRS, you have enough information to guide you when presented with form 1099 MISC or 1099 NEC.