The tax filing deadline of April 15 may not be the only important date you’ll need to remember during tax season. Depending on the payments your business makes throughout the year, you may be required to file Forms 1099-NEC or 1099-MISC.
While it’s common to confuse the two forms, there are important distinctions between the two. Thus, you must thoroughly understand the filing requirements and deadlines for each to avoid potential fines or penalties.
So, what is the difference between 1099-NEC and 1099-Miscellaneous? In this article, we’ll take a closer look at both forms and explore the key differences between them. We’ll also provide helpful tips and guidance on when and how to fill them out, helping you enjoy a smooth tax season.
What is Form 1099-NEC?
Form 1099-NEC is how businesses report Nonemployee Compensation, like payments made to freelancers or contractors throughout the year. This might include a marketing consultant you hired to run ads for your business, or a sole proprietor offering a cleaning service for your office space. As such, it is not required for W-2 employees.
The form includes boxes where you enter your (the payer’s) name and address, the recipient’s name and address, total compensation, tax identification number (TIN), and other details.
If you don’t remember needing to fill out this form a few years ago, you wouldn’t be mistaken. Form 1099-NEC recently re-emerged after being retired for nearly four decades. The IRS announced in mid-2019 that it would be reintroducing the form starting in the 2020 tax year. It was last used in 1982 under the Reagan administration, and the new version requires much more information than previously.
What is Form 1099-MISC?
Form 1099-MISC covers miscellaneous payments that your business has made throughout the year. This includes rent payments, medical and healthcare payments, prizes and awards, royalties, broker payments, gross proceeds paid to an attorney, and others.
The form includes boxes to enter your federal employer ID number (EIN), your name and address, the recipient’s name, address, and TIN, and the amount paid to them during the year. If the recipient is a corporation, a 1099-MISC is typically not required, though there can be exceptions.
So, let’s say you rent a small office space from an individual landlord; you’ll need to file Form 1099-MISC if the total payments for the year were above a certain dollar amount, which we’ll cover in further detail below. Or, if your company hosts a competition and pays out a large cash prize to the winner, if they are not an employee, you’ll likely need to issue them a 1099-MISC for the prize amount.
Key Differences Between 1099-NEC and 1099-MISC
Forms 1099-NEC and 1099-MISC are commonly confused with one another. Let’s take a closer look at the key distinctions between these forms to provide more clarity around when to use each (if any).
Payment Types Reported on Each Form
A big reason for the confusion between 1099-NECs and 1099-MISCs is that prior to 2020 (since the 1980s), payments to non-employees were reported on Form 1099-MISC, and 1099-NECs were not used.
However, as mentioned above, the IRS has now reintroduced Form 1099-NEC, with two distinct purposes and filing requirements for each form.
To reiterate: Form 1099-NEC is for payments made to freelancers, gig workers, or contractors above a certain threshold. It typically only applies to self-employed individuals or LLCs, though payments made to corporations for attorneys’ fees may also require you to file a 1099-NEC.
Form 1099-MISC is used to report miscellaneous payments, including things like:
- Rent
- Prizes
- Awards
- Medical and healthcare payments
- Attorney fees
- Fishing boat proceeds
- Crop insurance proceeds
- Payments to fishing boat crew members
- Gross proceeds paid to attorneys in association with legal services rendered
When to Use 1099-NEC vs. 1099-MISC
Not every payment that falls into the above categories warrants a 1099-NEC or 1099-MISC. There are certain dollar thresholds for each form, meaning they’re only required if your business makes total payments above a certain amount to a given individual or LLC during the tax year.
According to the IRS, Form 1099-NEC is required for each individual or LLC to whom you paid qualifying payments of $600 or more throughout the year. This means that if you pay an independent contractor $120 to create an email template design, you don’t need to file a 1099-NEC to report the payment. But if you pay them $120 several times over the course of the year, and total compensation tops $600, you will need to file the form.
There are similar requirements for Form 1099-MISC. You’ll need to file the form if you paid at least $10 in royalties or broker payments instead of dividends. Otherwise, you’ll need to file the form of miscellaneous payments to a certain individual or LLC are at least $600 for the year.
Filing Deadlines for 1099-NEC and 1099-MISC
There are strict filing deadlines for both Forms 1099-NEC and 1099-MISC. However, the deadlines differ depending on the specific form you’re filing. Pay close attention to the appropriate deadlines for each to avoid potential fines and other penalties.
Important Dates to Remember
The deadlines for each form can vary depending on how you file them. There may also be a different filing deadline for providing the form to the payee compared to the IRS.
Here are the deadlines to provide the payee with Form 1099-MISC:
- January 31st if filing by paper
- January 31st if filing electronically
You have a bit more time to file these forms with the IRS. Here are the deadlines:
- February 28th if filing by paper
- March 31st if filing electronically
On the other hand, Form 1099-NEC has one deadline for all filings: January 31st. This includes both paper and electronic filing methods, as well as furnishing the form to the IRS and the payee.
These are the same deadlines that apply every year. However, if any of these dates fall on a weekend or federal holiday, the deadline for filing automatically becomes the following business day.
Penalties for Missing Filing Deadlines for Forms 1099-NEC and 1099-MISC
Businesses are legally required to issue 1099-NECs and 1099-MISCs to payees and the IRS by the appropriate deadlines. If you miss this deadline or file a form incorrectly, you may incur penalties for each one.
The IRS indicates it will provide a notice by mail if they have imposed a penalty. Importantly, there are separate penalties for failing to file a correct form on time and failing to provide correct statements to payees by the deadline.
Penalties increase depending on how late the filing is. The IRS will also charge monthly interest until you’re able to pay the penalty in full. You can view the full table of penalty fees at the IRS website.
Concerned about missing the filing deadline and like to minimize penalties? Consider tax accounting services from an experienced team like Bob’s Bookkeepers.
Step-by-Step Guide to Filing Form 1099-NEC
Use these steps to complete Form 1099-NEC:
- Gather the necessary information. Collect the contractor’s/freelancer’s name, taxpayer identification number (TIN), and address from their W-9 form.
- Enter payer information. Fill out your business’s information in the payer’s section.
- Enter payee information. Enter the non-employee’s information in the recipient’s section.
- Enter payment amount. Include the total payments made to the individual over the course of the year in Box 1.
- Double-check details. Make sure all the information is correct to avoid penalties or inadvertent errors.
- Submit the forms. Provide copies of the form to the IRS and the recipient by the deadline. Also, keep a copy for your records and the state tax agency (in the states where it’s required).
Step-by-Step Guide to Filing Form 1099-MISC
To prepare Form 1099-MISC, complete the following steps:
- Gather the necessary information. Ensure you have all the details needed to complete the form, including the payee’s name, address, and TIN.
- Enter payer information. In the appropriate boxes on the form, fill out your information as the payer, including your business name, address, and TIN.
- Enter payee information. Insert the recipient’s information into the corresponding boxes on the form.
- Enter payment amount. Include the total payment amounts they received from you over the course of the year in Boxes 1 - 10.
- Double-check details. Verify that all details on the form are entered correctly. Any mistakes or inconsistencies may result in penalties.
- Submit the forms. Send copies of the form to the IRS and the recipient by the deadline, and retain a copy for your records and the state tax agency (where applicable).
Who Needs to File 1099-NEC and 1099-MISC Forms?
Remember that Forms 1099-NEC and 1099-MISC only apply to payments made to individuals or LLCs during the course of doing business. As such, they do not need to be filed for personal payments above the reporting thresholds, nor do they typically apply to payments made to corporations.
For instance, if you personally offer someone a monetary gift for their birthday, wedding, or other occasion, it typically doesn’t require either of these forms.
Alternatively, if you are a freelancer or independent contractor or received a miscellaneous payment from a business, you are not obligated to file this form. The entity that hired you or made the payment should furnish the appropriate 1099 to you by the proper deadline, which you will use to prepare your personal tax return.
Conclusion
The difference between 1099-NEC and 1099-MISC may be challenging to understand at first. However, both forms are used for distinct purposes, helping businesses report payments to individuals who are not employees.
Businesses that need help deciphering the filing requirements and deadlines for 1099s can reach out to us at Bob's Bookkeepers. Our accounting and bookkeeping experts are well-versed in a range of industries and are eager to offer tax guidance and planning for your specific needs.
Contact us today to speak with one of our experts.
