If you're not an employee but receive compensation, the question of what tax form you'll be using for the Internal Revenue Service (IRS) arises. There are several 1099 forms that are used by the IRS as informational forms to track income that is compensated to you outside of a company's employment.
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Consider also: How Does a 1099 Form Work?
What Is Form 1099-MISC?
Form 1099-MISC is used to report miscellaneous income. It is for nonemployee service payments of $600 or more in a calendar year. It also applies to royalty payments of $10 or more.
Form 1099-MISC must be received by the payees from the payer by February 1 following the taxable calendar year. Once received, you must file this tax form. This applies to both federal tax and state tax.
Think of the initials of the forms. NEC stands for nonemployee compensation and MISC stands for miscellaneous.
Why File Form 1099-MISC
Form 1099-MISC, referring to miscellaneous income, must be supplied to you and filed on your income tax return. It could be anything besides nonemployee compensation to a self-employed individual. Some instances of income are obvious while others might be more subtle. For instance, file Form 1099-MISC, if you receive at least $600 in:
- Crop insurance proceeds
- Any fishing boat proceeds
- Real estate
- Medical healthcare payments
- Cash payments for fish
- Prizes and awards
- Other income
It also applies if you don't have a permanent retail establishment but make at least $5,000 in direct sales from consumer products.
Consider also: About the Different Types of 1099 Tax Forms: What You Should Know
What Is Form 1099-NEC?
Form 1099-NEC is used to report nonemployee compensation from a company to a self-employed individual. It was developed to simplify the self-employment reporting process to the IRS. The 1099-NEC must be sent by a company to the taxpayer by February 1 following the taxable calendar year.
Why File Form 1099-NEC
The filing requirements for Form 1099-NEC are if you are self-employed and are paid $600 or more from a company. You will also file a 1099-NEC form if you are paid as an independent contractor, freelancer or service provider for a company. You will need to do both a federal filing and a state filing of your 1099-NEC.
Consider also: How Does the 1099-K Work?
Why Are There Different Forms?
Federal income tax Form 1099-NEC was developed in the early 1980s under the Reagan administration. This new form was simple. It had only one box to check if you were self-employed.
The IRS later added nonemployee compensation from a company to Form 1099-MISC. At that point, the 1099-NEC was eliminated, but this created confusion about the different filing deadlines. Nonemployee compensation from a company had a different reporting deadline than other miscellaneous compensation, yet they were on the same form.
The IRS reinstituted Form 1099-NEC in 2020. At that time, the 1099-NEC and 1099-NEC form due dates for the tax year were aligned so they both need sent by February 1. This clarified the confusion.
1099-NEC vs. 1099-MISC
One example of when you need to file Form 1099-MISC is if you are compensated personally. For instance, if you are a plumber who works on your neighbor's pipes as a favor, you would use Form 1099-MISC if compensated. Your neighbor is not a company. But if you are a self-employed plumber who works on a business's plumbing for compensation that would be different. You would need Form 1099-NEC for income.
Think of the initials of the forms. NEC stands for nonemployee compensation and MISC stands for miscellaneous. NEC is compensation from a company to an individual who is self-employed, while MISC is lumped into everything else. Specifically, MISC covers payments that are not going to a self-employed individual.
- IRS: Small Business, Self-Employed, Other business
- IRS: About Form 1099-MIS, Miscellaneous Income
- IRS: About Form 1099-NEC, Non-Employee Compensation
- Forbes: Why Did I Receive Form 1099-NEC Instead of 1099-MISC This year?
- UCLA Business Finance & Solutions: 1099-MISC (Miscellaneous Income Form)
- efile: 1099 Forms
- IRS: Businesses Have Feb 1 Deadline to Provide Forms 1099-MISC and 1099-NEC to Recipients