Form 1099-MISC vs 1099-NEC: What You Need To Know.
With the inclusion of the 1099-NEC tax form, the Internal Revenue Service (IRS) has changed how business owners and other taxpayers file for certain types of income and taxes.
In the past, the 1099-MISC form was used to report income for independent contractors.
Now the 1099-NEC is the new kid on the block and has replaced the 1099-MISC for reporting all payments made to contract workers and non-employees.
However, the 1099-MISC is still used to report business expenses unrelated to non-employee payments.
This article looks at the key differences between these 1099 forms and which ones you need to use to get through the tax season.
- There are a number of different 1099 tax forms used to report various business expenses. The most commonly used ones are the 1099-MISC and 1099-NEC forms.
- Form 1099-MISC is used to report any miscellaneous business expenses paid during the year, including royalties, rent, prize money, and many others.
- Form 1099-NEC is used to report any payments made to non-employees for services rendered during the year, including their compensation and other service-related payments.
What Are the 1099 Tax Forms Used For?
The 1099 forms are used to report taxable payments made to different kinds of employees and for different expenses.
Using these forms correctly ensures that you can track all your business expenses accurately.
As a business, you are responsible for sending the correct 1099 form to relevant employees and contract workers so that they can file their taxes.
The most commonly used 1099 forms are the 1099-MISC and 1099-NEC. Let’s take a closer look at which expenses these forms report to help you understand how to use them.
Form 1099-NEC
The 1099-NEC form was included in the tax system in 2020 and is used to report the taxable income of nonemployees specifically.
This includes freelancers, independent contractors, and other self-employed individuals that are subject to self-employment tax.
It’s also used to track any other compensation paid to non-employees, including:
- Compensation like prizes and awards for services performed by a non-employee.
- Oil and gas payments.
- Payments for the use of entertainment facilities.
- Payments to vendors for services rendered.
This form is used to track nonemployee compensation and report it to the IRS.
It also gives self-employed individuals an official document to attach to their 1040 tax return, replacing the W-2 refund form.
What should be included on the 1099-NEC form?
Although the 1099-NEC is fairly straightforward, you’ll need to ensure that you include all of the relevant information. If you miss something, you might face monetary penalties from the IRS.
The following needs to be included on your 1099-NEC forms:
- Name, address, and TIN of the nonemployee.
- The business name, address, and TIN of the entity issuing the form.
- The amount of taxable income paid during the year.
- The amount of state or federal income tax withheld from the nonemployee, if any.
Remember that every individual that receives a 1099-NEC form, must also get a W-9 form. Both must be filled in correctly and sent to the IRS.
Who requires this form?
Form 1099-NEC is used to report non-employee compensation businesses paid during the year.
Self-employed individuals must also submit this form with their tax returns to be eligible for a tax refund.
This form should be sent to the relevant people by January 31 of the applicable tax year.
Filing deadline for on-paper submissions: February 28, 2023.
Filing deadline for electronic submissions: March 31, 2023.
Form 1099-MISC
This is the most common 1099 form and is used to report miscellaneous compensation to individuals and entities during the year. It’s also used for reporting any business expenses.
Previously, the 1099-MISC form was also used to report non-employee compensation to track independent contractor income and expenses.
However, the 1099-NEC has replaced the 1099-MISC for reporting this expense.
The form serves as a filing record for the IRS and can be used as a receipt of payment by the person or entity that receives the compensation. The payee can also use this form to file their tax returns.
Form 1099-MISC is used to report on rent, royalties, prizes, awards, legal settlements, and other qualified reimbursements.
Businesses should also use it to indicate health care payments, payments to an attorney, and fishing boat proceeds if these have been made during the course of trade.
It’s also a common form for businesses and individuals who earn income from investments or rent from real estate, or who regularly purchase supplies from a number of clients.
What should be included on the 1099-MISC form?
To report payments on a 1099-MISC form, you must obtain the taxpayer identification number (TIN) of the person or entity to whom payment was made.
The form typically requires some personal information, like the person’s full name, address, and Social Security number (SSN).
If you’ve made payments to another business, you’ll need to include their Employer Identification Number (EIN).
Who requires this form?
A 1099-MISC should be filed if your business had miscellaneous expenses of at least $600 during the tax year.
This form should be sent to each person or entity to whom you’ve made payments. You should also ensure that you send this form to the relevant people by January 31 of each tax year.
Filing deadline for on-paper submissions: February 28, 2023.
Filing deadline for electronic submissions: March 31, 2023.
What Are the Key Differences Between Form 1099-MISC and Form 1099-NEC?
It may seem like the 1099-MISC and 1099-NEC are the same forms. However, they do differ in a few key areas.
Remember that the 1099-NEC replaces the 1099-MISC for non-employee compensation, but you still need to use the 1099-MISC to report miscellaneous business expenses.
We’ve compiled the table below to help you make sense of these differences.
| Form 1099-MISC | Form 1099-NEC | |
| Form is sent to the recipient. | Yes. | Yes. |
| Form is required by the IRS. | Yes. | Yes. |
| Type of taxpayer that requires this form. | Companies that have paid any miscellaneous business expenses during the year. | Nonemployees like freelancers, contractors, and other self-employed individuals. Businesses that make use of nonemployees during the year. |
| When is this form required | For any royalties exceeding $10. For expenses of $600 and above for: Prizes. Rents. Awards. Fishing boat proceeds. Medical and health care. Attorney fees. Nonqualified deferral compensation. For a comprehensive list of expenses, you can read the official IRS instructions. | At any time when the services of a non-employee are used during the year. |
Why Do These Differences Matter?
Knowing the difference between the 1099-MISC and 1099-NEC forms helps you to file your taxes correctly. You’ll also be able to track professional expenses more accurately.
In the event of an IRS audit, all registered businesses must be able to prove that they’ve been filing the correct forms to avoid legal problems and fines.
It also ensures that the relevant people are sent the correct forms when they are filing their personal taxes. Employers must send the relevant forms to recipients by January 31.
Exceptions for the 1099-NEC and 1099-MISC Forms
Some taxable expenses don’t have to be recorded on a 1099-MISC or 1099-NEC and can be added to other tax forms. These include:
- Payments to a corporation, including a limited liability company (LLC) that is treated as a C or S corporation).
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
- Payments of rent to real estate agents or property managers in certain instances.
- Wages paid to employees that can be reported on a W-2.
- Military wage payments made to employees while they are on active duty.
- Business travel allowances paid to employees that are reportable on Form W-2.
- Cost of current life insurance protection.
- Payments to a tax-exempt organization—including tax-exempt trusts— like the United States, a State, the District of Columbia, a U.S. possession or territory, or a foreign government.
- Payments made to or for homeowners from the HFA Hardest Hit Fund or similar State programs.
- Compensation for injuries or sickness by the Department of Justice or under a State program that provides benefits for surviving dependents of a deceased public safety officer.
- Compensation for wrongful incarceration for any criminal offense for which there was a conviction under federal or state law.
You can visit the IRS website for more information on navigating the exceptions when filing Form 1099-MISC and Form 1099-NEC.
Common Mistakes to Avoid When Filling Out 1099 Forms
There are a few things that can go wrong while completing a 1099 form. These mistakes can lead to late penalties that can become costly.
When you’re filling out your 1099 forms, avoid the following common mistakes:
- Not writing off all of your business expenses.
- Not keeping the appropriate records for your business.
- Counting expenses more than once.
- Failing to report all of your income.
- Missing the filing deadline.
- Filing the incorrect 1099 form.
- Filing on paper if an electronic copy is required.
- Using improper formatting.
You should also ensure that all the relevant information—like the addresses and TINs—is included on the form and that this data is correct.
Are There Any Penalties for Filing the Wrong Form?
If you file the wrong 1099 form, you may face a penalty for missing a deadline and will have to apply for a filing extension.
The penalties vary between the two forms, but you can typically expect to pay between $50 to $280 per form for missing a deadline.
If you intentionally file the forms incorrectly, you may face a penalty of up to $570 per form or 10% of the income reported on the form.
Failing to report any business expenses on either 1099 form can also lead to the IRS flagging your business as a tax liability. This can lead to further monetary penalties often worth thousands of dollars.
However, if you notice this problem and notify the IRS, you may be able to avoid a monetary penalty. Instead, you will have to file a corrected form that contains the right information.
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