Determining which form to use between 1099-NEC and 1099-MISC can prove challenging for most. Here is what each form is used for.
The IRS reintroduced the 1099-NEC form to declare payments of over $600 to a non-employee such as freelancers and independent contractors. The last time this form was in use was in 1982. The IRS says that generally, you must report payments made if they meet these conditions:
- You paid someone who is not under your employment
- You paid for services in the course of your business.
- You paid an individual, corporation, partnership, or estate
- The payment totaled $600 or more for the year.
Companies need to file the 1099-NEC:
- If they pay someone at least $10 worth of royalties
- If the company has held back federal income tax of whichever amount to the non-employee
Who Files Form 1099-NEC?
If your company hired an independent contractor and paid them over $600 in the annual year, you have a responsibility to file Form 1099-NEC and send the copy to the independent contractor.
Form 1099-MISC declares other payments by companies made besides non-employee compensation. If you have a business and receive payments from other companies, you and the IRS get a report if they are worth more than specific amounts in the tax year.
The IRS requires you to report the amounts via 1099-MISC in the case of payments if these payments are a representation of non-employee payments.
You need to file 1099-MISC for every person you paid during the tax year as follows:
- a) At least $10 in broker payments or royalties in place of tax-exempt interest or dividends.
- b) $600 in:
- Medical payments
- Prizes and awards
- Proceeds from crop insurance
- Other payments (income)
- Attorney payments
- Proceeds from fishing boats, etc.
You can also use 1099-MISC to report direct sales of $5,000 for resale, whether in a permanent retail business or elsewhere.
Who Files Form 1099-MISC?
You must file a Form 1099-MISC when you pay an independent contractor for services rendered while you are in the course of your profit-making activities. You don’t have to file a 1099-MISC for personal services such as babysitters, housekeepers, or gardeners.
To understand the difference, you own a professional babysitter service. You hire Clara as a babysitter and pay her $1,000 by check. You must report the $1,000 paid to Claire on Form 1099-MISC.
You hire Claire and pay her $1,000 via check to babysit your children while going on a work trip. Since this is not a business-related activity, you do not need to report this payment on Form 1099-MISC.
How Form 1099-NEC differs from Form 1099-MISC
One distinct difference between form 1099-NEC and 1099-MISC is that a business only uses form 1099-NEC to report non-employee payments. If a company needs to declare other forms of income such as royalties, rents, awards, or prizes paid out to third parties, it uses form 1099-MISC.
Typically, a person receives a 1099-MISC for reporting payments that are not subjectable to self-employment fees. A person who might earn an income for a one-off activity such as giving a speech at an event may receive Form 1099-MISC to report this money.
If you pay a contractor via credit/ debit card or a third-party organization like Payable or PayPal, you do not need to file a 1099-MISC. The same case applies if you pay a contractor over $600 during the tax year. It removes the administration burden, so it might be easier for you to pay them electronically. The payment processor reports the electronic payments depending on how many transactions they were and how much you paid the contractor.
How J. Zollo and Associates Can Help
We are a professional bookkeeping firm with fully certified bookkeepers. We work with you and develop a bookkeeping process where you are in total control of your financial operations. Check out our website or contact us for more bookkeeping information.