As a business owner, there are several IRS forms that come into play at tax time. Half the battle is knowing which form is required for what, along with an understanding of which forms you legally need to file.
In the event that your business has made payments to a vendor or independent contractor, you will probably need to file either Form 1099-NEC, Form 1099-MISC or both. Additionally, if you are filing these forms on paper instead of electronically, you will also need to file IRS Form 1096.
There are a few key details to know about each form, when you need to file them individually, and when you should file them together. Both Form 1099-NEC and Form 1099-MISC refer to different types of payments sent to nonemployees, either as nonemployee compensation or other payments that will be defined below.
Nonemployee compensation is often referred to as self-employment income and will include payments to workers that identify as self-employed, independent contractor, freelancer, consultant, etc.
Let’s take a closer look at information regarding Form 1099-NEC, Form 1099-MISC and Form 1096.
What Do I Need to Know About 1099-NEC?
Form 1099-NEC is the IRS tax form used to report nonemployee compensation. It was recently reintroduced, effective for tax year 2020, after having been retired by the IRS in 1982. During the interim years where Form 1099-NEC was not in use, businesses would typically use Form 1099-MISC to report compensation payments made to nonemployees.
However, after a 2015 tax law change, this was causing confusion about separate due dates for nonemployee compensation and other payments reported on the 1099-MISC. Form 1099-NEC was reintroduced to keep compensation expenses separate and to alleviate the confusion created by separate deadlines.
Form 1099-NEC must be filed for each person that has been paid $600 or more in nonemployee compensation during the year. Form 1099-MISC cannot be used to report nonemployee compensation, but it can be used for reporting rent, payments to an attorney, or a few other types of payments. The due date for filing Form 1099-NEC was January 31, using either paper or electronic filing procedures.
Do I Pay Taxes on 1099-NEC?
As a business owner, you are not responsible for paying or withholding taxes on behalf of the nonemployees that receive the 1099-NEC. Self-employed individuals are required to pay Social Security and Medicaid taxes on their own and will calculate their own self-employment taxes on Schedule SE, which will be submitted with their tax return.
What Do I Need to Know About 1099-MISC?
Form 1099-MISC is the IRS tax form used to report miscellaneous income paid out to each person you have paid during the year that is not compensation. You should not use Form 1099-MISC to report nonemployee compensation, as that is done on Form 1099-NEC.
The IRS provides a specific list of what should be reported on the 1099-MISC, which includes:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in:
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
- Generally, the cash paid from a notional principal contract to an individual, partnership or estate
- Payments to an attorney
- Any fishing boat proceeds
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Specifications determining what kind of payments are included, along with general instructions, can be found on the IRS website.
How Do I Complete the Forms?
The IRS provides detailed instructions for how to file 1099-NEC and 1099-MISC. These instructions provide an explanation for the entries within each box of the forms, as well as a refresher on what should be reported on each form.
What Is Form 1096?
Both the 1099-NEC and the 1099-MISC make reference to the additional step of needing to be filed with Form 1096. Officially, Form 1096 is known as the Annual Summary and Transmittal of U.S. Information Returns. It is an informational document used to transmit paper 1099 forms; it summarizes the information provided on 1099-MISC and 1099-NEC that are sent out. If you are filing electronically, IRS Form 1096 is not required.
If at any time you find yourself uncertain as to the difference between IRS Form 1099-NEC and IRS Form 1099-MISC, perhaps the most important detail to recall is that the 1099-NEC is Nonemployee Compensation (hence the acronym) and the 1099-MISC is for Miscellaneous Income. The forms themselves give you a description of what goes on them. If the payment you have been making to the nonemployee is not categorized as compensation, there’s a good chance it will fall under the parameters of miscellaneous income.
Some payments are exempt from being reported on 1099-MISC, such as payments to a corporation, rent payments to a real estate agent or property manager, payments for merchandise, and more. Fortunately, the IRS is very clear about what should be included on each type of 1099 form, so as long as you follow the links provided above and read the instructions, you should be able to complete each form fairly easily.
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