1099-NEC vs 1099-MISC: What’s the Difference?
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Were you self-employed and/or hired freelancers in or after 2020? Were you stumped by this new Form 1099-NEC that just showed up?
Read on to learn more about Form 1099-NEC vs 1099-MISC and how it applies to you. If so, you’re not alone!
This “new” form actually isn’t new at all. It was previously used and fell out of favor in the 1980s during Ronald Reagan’s administration. The IRS has recently reintroduced this form.
What Is the 1099-NEC Form?
Before 2020, Form 1099-MISC (box 7) applied to report nonemployee compensation. However, Form 1099-NEC now serves to meet this need. This box is no longer on Form 1099-MISC.
This change addressed responses to the Protecting Americans from Tax Hikes Act of 2015. This act is also known as the PATH Act. The PATH Act eliminated the automated 30-day filing extension.
This created confusion for businesses. The form was due at one time for self-employed people and at a different time for employees. To solve this confusion, the IRS reintroduced Form 1099-NEC.
The “NEC” in Form 1099-NEC stands for “Nonemployee Compensation”. This term is typically used for
- independent contractors
- people who are not employees of a third party business
Form 1099-NEC for employers now serves a similar purpose as Form W-2 does with their business employees.
For business owners, nonemployee compensation is payment made to someone who is not your employee. Recipients of these payments must be an individual, a partnership, an estate, or in some cases, a corporation. Only payments that are made for services in the course of your trade or business applications. The total payments made need to be $600 or more for the calendar year.
How Does Form 1099-NEC Differ From Form 1099-MISC?
Even though nonemployee compensation is no longer required for Form 1099-MISC, it is important to understand what the difference is between 1099-NEC and 1099-MISC. For Form 1099-MISC, additional reporting is still needed for
- direct sales of $5000 or more
- crop insurance proceeds
- fishing boat proceeds
- medical payments
- gross proceeds to an attorney (not fees)
- Section 409A deferrals
- nonqualified deferred compensation income
- royalties, rents, and prizes
- awards and substitute payments instead of dividends
These two forms are only two of several types of 1099 forms so reach out to a tax advisor if there is any confusion about which form you should use.
For those looking to avoid the hassle of multiple filing deadlines, you need to understand the differences between Form 1099-NEC and Form 1099-MISC. Both documents must be filed with the IRS by the deadline of Jan. 31. However, the latter has a simpler deadline. If you are unsure which is right for you, here are a few things to consider. One of the biggest differences is the deadline. If you file your 1099-NEC before that date, you should consider this when filing it.
The 1099-NEC is a separate form for payments made to non-employees. The 1099-NEC covers non-employee compensation, such as payments from a ride-hailing service. Its name is a slight change from “1099-MISC,” but the form still reflects a similar structure.
What Are Best Practices When Issuing a Form 1099-NEC?
For businesses who have hired self-employed contractors or freelancers, it is important to make sure the recipient’s taxpayer ID is correct. You can do this by verifying this against their Form W-9.
To avoid penalty, you must distribute Form 1099-NEC to recipients and file it with the IRS by the due date each year. This due date is typically on January 31st but may move if this falls on a weekend.
The IRS uses two tax forms, 1099-NEC and 1099-MISC, to report non-employee compensation. Both forms were formerly in use and have been used for similar purposes. However, a change to the tax law in 2015 resulted in confusion over their respective due dates. The IRS reintroduced the 1099-NEC to keep non-employee compensation separate from non-employee compensation.
The IRS became aware of a scheme in the past where taxpayers would report minimal nonemployee compensation while reporting large tax withholdings. This led to huge refunds in the Earned Income Tax Credit. Many of these taxpayers were filing their returns early in the tax season, well before the required date to file Form 1099-NEC. The IRS was unaware of this scheme, as the payors had not filed an informational return with the IRS.
Form 1099-NEC should not be used for personal payments or employee wages.
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