Most freelancers and self-employed individuals are aware of Form 1099-MISC, and others aren’t. It doesn’t matter whether you are self-employed or a freelancer. You should know the difference between a 1099-MISC and a 1099-NEC to run a smooth tax season.
This blog will provide everything, including the details of Form 1099-MISC and Form 1099-NEC, their purposes, who uses them, and the information required for each form.
What is Form 1099-MISC?
A Form 1099-MISC is a tax form for businesses to report various payments which are not implied towards self-employment tax, including rents, awards, medical and healthcare benefits. You can use this form to report any divergent payment of at least $600 paid to an individual or any business.
Who uses Form 1099-MISC?
If a business has paid an individual or an LLC at least $600 in a period of one year in the form of rent or legal settlements, then you can use the 1099-MISC form.
What is Form 1099-NEC?
Corporations use Form 1099-NEC to report over $600 in non-employee compensation (NEC). The independent contractors visit only the self-employed individuals subject to self-employment tax. Generally, this could include payments given to graphic designers for freelance work or for an assignment.
Who uses Form 1099-NEC?
Form 1099-NEC is used mostly by freelancers or contractors- basically, anyone who works for more than $600 for a business client in a year without being employed by that business.
Below is mentioned who uses Form 1099-NEC:
- Freelancers: Writers, designers or editors, no, matter whether they operate as LLCs or as sole proprietors. They will use the 1099-NEC form in case they receive any kind of compensation during the year.
- Contractors: Any contractor not paid as a W-2 employee via a staffing firm will receive a Form 1099-NEC.
- Independent Service Providers: Any small business providing services like graphic designing, website designing or accounting services will likely come under this category of reporting.
How to file Form 1099-NEC?
For each Form 1099-NEC, two copies will be filled out with the exact same information: Copy A and Copy B.
If you have hired an independent contractor and paid $600 that year, you must report their total earnings in that particular year. Copy A is only for the IRS, while Copy B is sent to the contractor.
If you are the contractor receiving Copy B, it is not your responsibility to file Form 1099-NEC. But you should request a copy of the form from your client base and for your own records. All of your income will be reported in Schedule C.
What are the Penalties for Delaying Form 1099-NEC?
The penalties planned out for delaying the submission of Form 1099-NEC solely depend on how late the form arrived. The following penalties are charged:
- If late by 30 days, then the penalty is $50
- If late by 30 days by filing before Aug 1st, then the penalty is $100
- If you have sent an application by Aug 1st or later, the penalty is $260
Information required for Form 1099-MISC and Form 1099-NEC
When you complete a 1099 form, an employee must include certain information about the payee.
Below is the information required for each of the forms:
- Name of the Payee: The form must have the name of the payee, irrespective of whether they are an individual or a company.
- Type of Payee: The form also includes the entity of the payee, whether it’s an individual or a partnership firm.
- Address: The payee’s address also goes into the form.
- Tax ID: A tax ID identical to the payee is also mentioned in the form.
Instructions about Form 1099-NEC & Form 1099-MISC:
Follow the below instructions for filing report income on Form 1099-NEC and Form 1099-MISC:
- Qualify: This is the first step using a 1099-NEC or 1099-MISC form. This may seem like winning a reward or getting hired by an individual contractor.
- Complete a W-9: When you get hired by an independent contractor or a company, the first step will be to complete a W-9. This informs the contractor or the company of the payment they will make to you after you complete the W-9.
- Give the Performance & Get Paid: Once you have paid the information to the company that will be paying you, you will start receiving the payment. If you are an independent contractor, this will require you to render the services you were hired for.
- Develop a 1099: It’s easy for a company that makes $600 or more to generate a 1099. This process must be completed by Jan 31st, with one copy sent to the IRS and the other to the payee.
- Taxes Filing: Once the payee receives their 1099, they will use that form to report their income on their tax return before the tax filing deadline.
Conclusion:
Form 1099-MISC and Form 1099-NEC are crucial tax forms that report income paid to non-employees or service providers. While they share similarities, it is important to understand their differences and use the correct form based on the reported income type.
By accurately completing these forms and adhering to IRS guidelines, businesses and individuals can fulfil their reporting obligations and avoid penalties. Consult with a tax professional or refer to the official IRS instructions for specific guidance related to your situation.
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