Between W-2s, W-9s, 1099s, it’s easy to get confused between all the forms needed for tax purposes.
To add to the chaos, the IRS reintroduced form 1099-NEC. What does that mean for you?
In most cases, you might need to start filling out form 1099-NEC for your independent contractors. However, you might need to keep using form 1099-MISC.
Confused again? Then keep reading to learn what exactly form 1099-MISC is, how to fill it out, and why it even matters.
What Is A 1099-MISC?
Let’s start by learning what exactly is a 1099-MISC form. A 1099-MISC is a form issued by the IRS to report non-salary income.
There are many types of 1099s, but the 1099-MISC is one of the most common. The MISC signals miscellaneous income to the IRS.
Who Needs To Fill Out A 1099?
Each tax year, your business will need to fill out certain forms, like a W-2 or 1099, for taxes according to who you paid and how much you paid them.
If you are a business, company, or other paying entity that paid a specific vendor over $600, you need to fill out a 1099-MISC form for each vendor.
This does not include freelance contractors your business hired. You will need to fill out form 1099-NEC for them.
Others that will receive a 1099-MISC form include those who collected royalties of at least $10, any backup withholding, any direct sales over $5,000, and any golden parachute payments. We will go into the specifics later on in this article.
How Do I Fill Out A 1099-MISC?
As the payer, you will need to gather a few key pieces of information to fill out the 1099-MISC form. This includes the non-employee’s full legal name, social security number, and address. All of this information should be found on their W-9.
Additionally, you should know the total payment amount for the financial year.
You will also need to include your name (or the payer entity/company’s name), identification number, and address.
The type of service, trade, or payments between the payer and the non-employee determines which box(es) you (the payer) will fill out. Common boxes include Rents in box 1, Royalties in box 2, and Non-Employee Compensation in Box 7. However, if you are planning to fill out Box 7 in 2020 taxes, you likely will need to fill out a 1099-NEC instead of a 1099-MISC, and we’ll go into depth on this later.
Other boxes that you might fill out in the 1099-MISC include Box 4, the federal income tax withheld, and Box 16, the state tax withheld.
You can find Form-1099 in all its variations on the IRS website.
How To File 1099 misc
Now that you filled out the form, what do you do with it? You have two options: file by paper, or file online.
Before filing, you/the payer will fill out multiple copies of the form if you are filling out paper copies. Each of these copies has a specific recipient.
- Copy A (the red copy) is sent to the IRS
- The address that you send the form(s) to depends on your state of business
- Copy B is sent to the recipient
- Copy C is yours to keep in your records
- Copy 1 is sent to the State Tax Department (depends on State)
- Copy B is also sent to the recipient
If you are submitting via mail, you need to include Form 1096 that summarizes all your 1099-MISC forms. Sound like too much paperwork for you? Then consider filing electronically.
You also have the option to submit your 1099s electronically through the Filing Information Returns Electronically (FIRE) IRS system.
There are a few things you must do before submitting electronically. First, you need to have compatible accounting software to fill out the forms electronically.
Second, you must request a Transmitter Control Code (TCC) before creating an account. This can be done by filling out form 4419 and mailing it to the IRS. Once you have the code and the accounting software you can successfully e-file.
To digitally send the copy to the entity that you paid, you will need consent. If you plan to send them their copy of the 1099-MISC over email, email them to make sure they consent to be sent the form digitally.
Whether you submit by mail or electronically determines the due date. For the 2020 tax year, you must issue a copy to your recipient by February 1. The due date allows your recipient to file their own taxes on time.
If you are filing a paper copy, it is due to the IRS by March 1, 2021. For those that submit electronically, the deadline is March 31, 2021. These deadlines are in place to prevent tax fraud, and you will be fined if you don’t file in time.
What Happens If I Don’t Send A 1099-MISC Form?
If you don’t send in your 1099-MISC or if you forgot to send your 1099-MISC you will be penalized. The longer you wait, the more money you will have to pay to the IRS.
If you file within 30 days of the deadline, your fine is $50. After that, your fine is $100 if you file before August 1. After August 1, you must pay $260.
If you don’t file at all, your minimum fine is $530. Save yourself the future trouble and file on time.
If for some reason you absolutely can’t file on time, you may request an extension. Just fill out Form 8809 from the IRS and mail or fax it in.
Common 1099-MISC Mistakes
If this is your first time filling and filing a 1099-MISC, you might make a mistake. There are two kinds of mistakes you can make while filling out your 1099-MISC form:
- Type 1 includes errors regarding money amounts, incorrect checkboxes, or wrong codes
- Type 2 errors range from incorrect payee name or wrong TIN
When you make a mistake after filing, you will need to fill out a corrected 1099-MISC. For more info on how to correct a mistake, check out the IRS’s guide to filing forms.
1099 NEC vs 1099 MISC and Other Forms of 1099s
There are many variants of 1099 forms, including the 1099-A, 1099-C, 1099-K, and 1099-S. Besides the 1099-MISC, another popular form of 1099 is the 1099-NEC.
In 2020, the IRS reintroduced the 1099-NEC. For many businesses, this means they have to fill out the 1099-NEC for 2020 taxes instead of the familiar 1099-MISC. Though it may seem daunting at first, the process is pretty much the same.
To make sure you know exactly what form to fill out, let’s compare the 1099-MISC and the 1099-NEC.
Simply put, if your business made payments not related to non-employee compensation, you most likely need to fill out the 1099-MISC form.
The following would require a 1099-MISC:
- If you paid at least $600 in:
- Medical and/or health care payments
- Cash payments for fish from those in the business of catching fish and other aquatic life
- Prizes and awards
- Payments to an attorney
- Crop insurance payments
- Cash paid from a principal contract to an estate, partnership, or individual
- Fishing boat proceeds
- other income payments
- $10 or more in royalties or broker payments
- Direct sales of $5,000 or more in consumer products for resale
You must fill out a 1099-MISC for each entity you paid for any of these categories. If, in addition to these payments requiring a 1099-MISC, you also paid an individual contractor, you will also need to fill out a 1099-NEC form.
Though in the past you might have given or received a 1099-MISC as a freelance contractor, the rules have changed. Now the IRS requires form 1099-NEC for any compensation to non-employees.
In short, the 1099-NEC is only used for Non-Employee Compensation.
If you hired an independent contractor and paid them more than $600 over the past year, you are required to fill out form 1099-NEC.
The form itself has fewer boxes than the 1099-MISC. On the left side of the form, you will find boxes to input the non-employees information, including their name, address, and social security number. On the right side is where you would write in the total paid to them over the year, as well as any income tax withheld.
Employees and non-employees are very different in the eyes of the IRS. For employees, you need to fill out a W-2, and not a 1099-NEC. Filling out 1099s for your employees to avoid taxes will result in penalties.
Other Types of 1099s:
The following are other forms of 1099s that you might encounter.
Sell a house this year? You will receive form 1099-S from whoever closed the sale. However, this doesn’t mean that you will be taxed on the proceeds of the real estate you sold.
If you made a distribution or payment of at least $10 to an income become benefit plan or an IRA, you will need to fill out form 1099-R. Also on this list are profit-sharing or retirement plans, annuities, insurance contracts, pensions, and charitable gift annuities.
If you received payment of over $10 from a person or entity (not your employer), you’ll receive form 1099-DIV. It should be noted, though, that form 1099-DIV is different than form 1099-PATR, the form for Taxable Distributions From Cooperatives.
Form 1099-A is for the acquisition or abandonment of secured property. If your home was foreclosed, you will generally receive a 1099-A. Also, any canceled debt is treated by income by the IRS, and it will be taxed.
The 1099-B form is used to report proceeds from broker and barter exchanges. Brokers fill out the form for individual taxpayers/their customers to report their gains and losses over the tax year.
Did you receive a distribution of more than $10 from a cooperative? Then you will be sent form 1099-PATR to report it in your taxes. The distribution might be referred to as patronage dividend.
Earning interest from your bank or brokerage is an easy way to earn a little extra money. If you collected over $10 of interest, you will receive a 1099-INT.
Received money from the government? Then you shouldn’t be surprised when you also receive a 1099-G along with it. Money from the government includes tax refunds, credit, or unemployment.
Why Does It Matter?
What’s the point of all this paperwork? Well, the IRS needs to know the payments you made over the year. More so, they are interested in how much in taxes are owed on these payments.
Specifically, for the 1099-MISC, the IRS wants to know any income you made, whether through royalties, monetary prizes, or fishing boat proceeds, etc. Since you didn’t initially pay taxes, they need to know what you owe.
Failure to submit your 1099 will result in you paying the IRS more money. And who wants that? Save yourself the trouble and do the paperwork correctly and on time.
Filling and Filing Your 1099-MISC Forms
Your business’s tax forms are nothing to be scared about. As long as you keep track of who you paid throughout the year and know the difference between all the IRS forms, you will be fine.
Here are a few key takeaways to remember:
- The 1099-MISC form is NOT used for non-employee compensation anymore
- You can file both by mail and by the online FIRE system, but there are separate deadlines and procedures for both
- 1099-MISC forms matter because the IRS needs to know what you owe in taxes
- You will owe a fine if you don’t submit on-time
Have more questions regarding your business? Check out any of our other articles. We cover topics from productivity to money management. Start reading today!