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What Is IRS Form 1099-MISC and Who Needs It?

March 25, 2021
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One of the most commonly used IRS forms for independent contractors is Form 1099-MISC. However, this form, which stands for miscellaneous income, can be used by various taxpayers, and for several purposes. In addition to this, the IRS changed the purpose of  Form 1099-MISC in 2020. All of this information might be difficult to manage, so we broke it down for easier understanding.

What was Tax Form 1099-MISC?

Taxpayers used to file this IRS form for business payments - in order to report non-employee compensation that exceeded the limit of $600. However, in 2020, the Internal Revenue Service has re-introduced the Form 1099-NEC for this purpose. What does this mean? Well, if you, acting as a client, during a calendar year pay more than $600 to an independent contractor or a freelancer, you need to use Form 1099-NEC, in your 2020 tax reporting. This also goes for sole-proprietors and self-employed individuals. They all, instead of receiving the Form 1099-MISC, need to receive Form 1099-NEC from each client that has paid for their services more than $600.

What are the differences between Tax Form 1099-MISC and Form 1099-NEC?

Form 1099-MISC used to have a special box, number 7 on the form, that was used to disclose non-employee compensations that were more than $600. However, since the deadline for this form, and the deadline for the Form W-2 that is used for employee compensation, were separated by two months, it created a lot of room for manipulation of the system. In order to put a stop to it, the Internal Revenue Service has decided to re-introduce the Form 1099-NEC, previously retired in 1982.

NEC stands for non-employee compensations, meaning businesses will use solely this form to report payments over $600 to someone that isn't working for them as an employee. That can be any freelancer, independent contractor, or anyone who is self-employed. Any service provider that has received at least $600 from the business, needs to receive this form, in order for all taxes to be filled accordingly.

One thing to have in mind is that this change applies to the 2020 tax year, meaning that clients should file their NECs in the first two months of 2021.  If you are filing taxes for 2019, you are still required to file according to the old rules and regulations.

Have in mind that even if your income is below the $600 mark, you are still required to report it to the IRS.

It is important to mention that nor Form 1099-MISC nor Form 1099-NEC can be issued by your employer, that is if you are working as an employee. You can use both of these forms to report income, and other earnings provided to you by an entity you don't work for full-time. If you are self-employed, or if you earned money through a contest as a prize, for example.

What is Form 1099-MISC used for now?

Even when you remove the use related to independent contractors, there are still plenty of uses for this form. The $600 limit still exists, but for other types of payment. Business file form 1099-MISC  in order to report rents, awards, prizes,  medical and health care payments (including Social Security and Medicare taxes), income payments,  as well as gross proceeds payments to attorneys. It is also filed for crop insurance proceeds, and for cash paid for a notional principal contract (regardless if it's to an individual, partnership, or an estate).

Form 1099-MISC: Miscellaneous Income is important to fishermen since is it also used for cash payments for fish (and all related aquatic life), as well as any proceeds coming from a fishing boat.

We should also mention that another use of this form is by a taxpayer who has paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest to another individual.

As you can see there are several uses for this form, but this last one is quite different. Form 1099-MISC is used for tax fillings of earnings obtained through direct sales of consumer products in the amount no less than $5,000. This is only filled when the goods are sold to a buyer for resale anywhere other than a permanent retail establishment.

As soon as you receive Form 1099-MISC from a certain entity, IRS will know about it. That interest needs to be reported on your tax return. However, just because you received this form doesn't mean that you are due to pay taxes on the money you earned. There are various tax deductions or exceptions, that you can look into. You simply need to be aware that this income is visible to the IRS as soon as the Form is issued.

If a business doesn't issue a Form 1099-MISC, the Internal Revenue Service will send notice CP2000. If you fail to file these forms, or if they aren't filled correctly or on time, you will receive a penalty. Small businesses will be required to pay a smaller fee.

Are there any exceptions to the $600 limit?

Not many. In a few cases, the limit we mentioned above isn't relevant. Below is the full list:

  • Box 2 - Royalties: If you make a payment of $10 or more to property owners in order to use that property. Have in mind that this applies to intellectual property as well.
  • Box 4 - Backup withholding: If you were required to withhold money from someone because of a backup court order, you need to use this form. This applies even if the amount is less than $600.
  • Box 13 - Excess golden parachute payments: If you as an employer choose to exceed the average annual compensation for your employee, you need to include it in this form.

Who uses IRS Tax Form 1099-MISC?

This form is a necessity for clients, trades, and businesses in order to report how much they have paid to others within a calendar year. Who this applies to? Well, to various entities. You are obligated to fill in this form if you are operating for gain or profit, but also if you are a non-profit organization. In addition to that, this form is issued by trusts, by widely held fixed investment trusts, as well as the ones for pensions and profit-sharing. Another example is of an entity that needs to use this form is a non-exempt farmers' cooperative.

How to fill in IRS Form 1099-MISC?

Before you begin filing...

Just like with any other IRS form, make sure that you have respected the deadline - in this case, it is the end of February, or if you've chosen electronic filling, the due date is March 31st. Payers have until then to send the form to the recipients, who are required to attach this form to their tax return when filing.

If you have more than 250 forms in a year, you need to file electronically, using the FIRE system - Filing Information Returns Electronically. If you have less than 250 forms, you don't have to efile, you can do it by mail, but you need to include Form 1096, that serves as a summary. If you choose to do it by mail, you should check IRS General Instructions for Certain Information Returns. It will allow you to obtain your designated mailing address, based on the location of your business.

Before you even get started make sure you have all the information. Your payee needs to provide you with the Form W-9. It is used to verify the identity of the payer and to obtain the most important info - taxpayer ID number.

Filling out the Tax Form 1099-MISC

The filing form itself can be found on the IRS website, and there are several copies. Not all of them go to the same place, so let's break it down.

Copy A, which appears in red, is not intended for print. It is for informational purposes only. The parts that should be completed and printed are in black, and there are several important things to know. Copy 1 needs to go to the recipient's state tax department, while Copy B stays with the recipient. Copy 2 is attached along with the recipient's state tax return, while Copy C stays with the payer.

When it comes to the data that you will need, both payer and recipient need to disclose their name and address. However, while the recipient can use their Social Security number, the payer needs to include their taxpayer identification number.

The most important part of Form 1099-MISC is the boxes. They are used to indicate which kind of payment was made. Box 1 is for rent, Box 2 for Royalties, Box 4 for Federal Income Tax Withheld, and Box 16 is for State Tax Withheld. Box 7 was used for non-employee compensation, but like we said it isn't used anymore.

Another important checkbox on Form 1099-MISC is the one for the Foreign Account Tax Compliance Act filing requirement. If you have any foreign assets that may be subject to withholding under FATCA reporting, you need to acknowledge it through this form.

Tax forms you need as an independent contractor

As a payee and not the client, you are on the receiving end of forms, not on the giving one. However, that doesn't mean that you shouldn't be informed. If you have income that you don't report, you are to blame. So, make sure that you are up to date with the newest IRS rules and regulations.

In this case, make sure that form filers, in this case, your clients, file the correct forms for your earning, so your tax payments will be in order. They need to fulfill all of the filing requirements. For tax reporting in 2019 use Form 1099-MISC, box 7, and for 2020, use the renewed Form 1099-NEC. This only applies if the total amount of your earnings is more than $600. If they, or you, have any doubts, you can always check irs.gov, in order to get the latest information.  

Are there any other IRS Forms I need to know about?

The Form 1099 series has several forms one might use as a business owner, although Form 1099-MISC is probably the most unusual one. We have listed a couple of others that might be useful for you as well.

Form 1099-G

For every tax refund that you received, including tax credit and tax offset, you need to file a 1099-G. This form is used not only for this but for every income you receive from a state, local, or federal government for any reason.

Form 1099-B

Form 1099-B is used to file income generated from the sale of various types of securities, and even some type of bartering that usually takes place online.

Form 1099-LTC

Even if what you received during a calendar year isn't taxable income, you still need to report. Form 1099-LTC covers income related to health and insurance payments, such as long-term care insurance, or payments received from a life insurance policy, in cases of unexpected and sudden deaths.  

Form 1099-R

IRS likes to keep tabs on every income, for detailed record-keeping, so you shouldn't be surprised that your pension and retirement plan have their own form as well. They are filled under 1099-R, along with any profit-sharing program or annuity. If you are receiving payments for disability, that income needs to be filled under this form as well.

Form 1099-DIV

For banks and other financial institutions who do business with investors, issuing them dividends and distributions, there is a Form 1099-DIV.

Form 1099-K

Form 1099-K is only used by a payment settlement entity. For any reportable payment transaction, or better said any payment card or a third pay network transaction, a PSE makes a payment in the settlement.

Form-1099-S

The real estate market is well acquainted with the 1099-S. This form is used by anyone who closed a sale, or even an exchange of a property.

Tax reporting can seem to appear as complicated at first, but we hope this article has given you thorough guidance that will make it easier for you to determine which tax forms you need to file.

Tax documents

Automate your tax document collection

From collecting tax forms to storing them all in one place, we automate everything, so you can stay focused on growing your business.

Learn more

Back to blog
Legal

What Is IRS Form 1099-MISC and Who Needs It?

March 25, 2021

One of the most commonly used IRS forms for independent contractors is Form 1099-MISC. However, this form, which stands for miscellaneous income, can be used by various taxpayers, and for several purposes. In addition to this, the IRS changed the purpose of  Form 1099-MISC in 2020. All of this information might be difficult to manage, so we broke it down for easier understanding.

What was Tax Form 1099-MISC?

Taxpayers used to file this IRS form for business payments - in order to report non-employee compensation that exceeded the limit of $600. However, in 2020, the Internal Revenue Service has re-introduced the Form 1099-NEC for this purpose. What does this mean? Well, if you, acting as a client, during a calendar year pay more than $600 to an independent contractor or a freelancer, you need to use Form 1099-NEC, in your 2020 tax reporting. This also goes for sole-proprietors and self-employed individuals. They all, instead of receiving the Form 1099-MISC, need to receive Form 1099-NEC from each client that has paid for their services more than $600.

What are the differences between Tax Form 1099-MISC and Form 1099-NEC?

Form 1099-MISC used to have a special box, number 7 on the form, that was used to disclose non-employee compensations that were more than $600. However, since the deadline for this form, and the deadline for the Form W-2 that is used for employee compensation, were separated by two months, it created a lot of room for manipulation of the system. In order to put a stop to it, the Internal Revenue Service has decided to re-introduce the Form 1099-NEC, previously retired in 1982.

NEC stands for non-employee compensations, meaning businesses will use solely this form to report payments over $600 to someone that isn't working for them as an employee. That can be any freelancer, independent contractor, or anyone who is self-employed. Any service provider that has received at least $600 from the business, needs to receive this form, in order for all taxes to be filled accordingly.

One thing to have in mind is that this change applies to the 2020 tax year, meaning that clients should file their NECs in the first two months of 2021.  If you are filing taxes for 2019, you are still required to file according to the old rules and regulations.

Have in mind that even if your income is below the $600 mark, you are still required to report it to the IRS.

It is important to mention that nor Form 1099-MISC nor Form 1099-NEC can be issued by your employer, that is if you are working as an employee. You can use both of these forms to report income, and other earnings provided to you by an entity you don't work for full-time. If you are self-employed, or if you earned money through a contest as a prize, for example.

What is Form 1099-MISC used for now?

Even when you remove the use related to independent contractors, there are still plenty of uses for this form. The $600 limit still exists, but for other types of payment. Business file form 1099-MISC  in order to report rents, awards, prizes,  medical and health care payments (including Social Security and Medicare taxes), income payments,  as well as gross proceeds payments to attorneys. It is also filed for crop insurance proceeds, and for cash paid for a notional principal contract (regardless if it's to an individual, partnership, or an estate).

Form 1099-MISC: Miscellaneous Income is important to fishermen since is it also used for cash payments for fish (and all related aquatic life), as well as any proceeds coming from a fishing boat.

We should also mention that another use of this form is by a taxpayer who has paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest to another individual.

As you can see there are several uses for this form, but this last one is quite different. Form 1099-MISC is used for tax fillings of earnings obtained through direct sales of consumer products in the amount no less than $5,000. This is only filled when the goods are sold to a buyer for resale anywhere other than a permanent retail establishment.

As soon as you receive Form 1099-MISC from a certain entity, IRS will know about it. That interest needs to be reported on your tax return. However, just because you received this form doesn't mean that you are due to pay taxes on the money you earned. There are various tax deductions or exceptions, that you can look into. You simply need to be aware that this income is visible to the IRS as soon as the Form is issued.

If a business doesn't issue a Form 1099-MISC, the Internal Revenue Service will send notice CP2000. If you fail to file these forms, or if they aren't filled correctly or on time, you will receive a penalty. Small businesses will be required to pay a smaller fee.

Are there any exceptions to the $600 limit?

Not many. In a few cases, the limit we mentioned above isn't relevant. Below is the full list:

  • Box 2 - Royalties: If you make a payment of $10 or more to property owners in order to use that property. Have in mind that this applies to intellectual property as well.
  • Box 4 - Backup withholding: If you were required to withhold money from someone because of a backup court order, you need to use this form. This applies even if the amount is less than $600.
  • Box 13 - Excess golden parachute payments: If you as an employer choose to exceed the average annual compensation for your employee, you need to include it in this form.

Who uses IRS Tax Form 1099-MISC?

This form is a necessity for clients, trades, and businesses in order to report how much they have paid to others within a calendar year. Who this applies to? Well, to various entities. You are obligated to fill in this form if you are operating for gain or profit, but also if you are a non-profit organization. In addition to that, this form is issued by trusts, by widely held fixed investment trusts, as well as the ones for pensions and profit-sharing. Another example is of an entity that needs to use this form is a non-exempt farmers' cooperative.

Tax documents

Automate your tax document collection

From collecting tax forms to storing them all in one place, we automate everything, so you can stay focused on growing your business.

Learn more

How to fill in IRS Form 1099-MISC?

Before you begin filing...

Just like with any other IRS form, make sure that you have respected the deadline - in this case, it is the end of February, or if you've chosen electronic filling, the due date is March 31st. Payers have until then to send the form to the recipients, who are required to attach this form to their tax return when filing.

If you have more than 250 forms in a year, you need to file electronically, using the FIRE system - Filing Information Returns Electronically. If you have less than 250 forms, you don't have to efile, you can do it by mail, but you need to include Form 1096, that serves as a summary. If you choose to do it by mail, you should check IRS General Instructions for Certain Information Returns. It will allow you to obtain your designated mailing address, based on the location of your business.

Before you even get started make sure you have all the information. Your payee needs to provide you with the Form W-9. It is used to verify the identity of the payer and to obtain the most important info - taxpayer ID number.

Filling out the Tax Form 1099-MISC

The filing form itself can be found on the IRS website, and there are several copies. Not all of them go to the same place, so let's break it down.

Copy A, which appears in red, is not intended for print. It is for informational purposes only. The parts that should be completed and printed are in black, and there are several important things to know. Copy 1 needs to go to the recipient's state tax department, while Copy B stays with the recipient. Copy 2 is attached along with the recipient's state tax return, while Copy C stays with the payer.

When it comes to the data that you will need, both payer and recipient need to disclose their name and address. However, while the recipient can use their Social Security number, the payer needs to include their taxpayer identification number.

The most important part of Form 1099-MISC is the boxes. They are used to indicate which kind of payment was made. Box 1 is for rent, Box 2 for Royalties, Box 4 for Federal Income Tax Withheld, and Box 16 is for State Tax Withheld. Box 7 was used for non-employee compensation, but like we said it isn't used anymore.

Another important checkbox on Form 1099-MISC is the one for the Foreign Account Tax Compliance Act filing requirement. If you have any foreign assets that may be subject to withholding under FATCA reporting, you need to acknowledge it through this form.

Tax forms you need as an independent contractor

As a payee and not the client, you are on the receiving end of forms, not on the giving one. However, that doesn't mean that you shouldn't be informed. If you have income that you don't report, you are to blame. So, make sure that you are up to date with the newest IRS rules and regulations.

In this case, make sure that form filers, in this case, your clients, file the correct forms for your earning, so your tax payments will be in order. They need to fulfill all of the filing requirements. For tax reporting in 2019 use Form 1099-MISC, box 7, and for 2020, use the renewed Form 1099-NEC. This only applies if the total amount of your earnings is more than $600. If they, or you, have any doubts, you can always check irs.gov, in order to get the latest information.  

Are there any other IRS Forms I need to know about?

The Form 1099 series has several forms one might use as a business owner, although Form 1099-MISC is probably the most unusual one. We have listed a couple of others that might be useful for you as well.

Form 1099-G

For every tax refund that you received, including tax credit and tax offset, you need to file a 1099-G. This form is used not only for this but for every income you receive from a state, local, or federal government for any reason.

Form 1099-B

Form 1099-B is used to file income generated from the sale of various types of securities, and even some type of bartering that usually takes place online.

Form 1099-LTC

Even if what you received during a calendar year isn't taxable income, you still need to report. Form 1099-LTC covers income related to health and insurance payments, such as long-term care insurance, or payments received from a life insurance policy, in cases of unexpected and sudden deaths.  

Form 1099-R

IRS likes to keep tabs on every income, for detailed record-keeping, so you shouldn't be surprised that your pension and retirement plan have their own form as well. They are filled under 1099-R, along with any profit-sharing program or annuity. If you are receiving payments for disability, that income needs to be filled under this form as well.

Form 1099-DIV

For banks and other financial institutions who do business with investors, issuing them dividends and distributions, there is a Form 1099-DIV.

Form 1099-K

Form 1099-K is only used by a payment settlement entity. For any reportable payment transaction, or better said any payment card or a third pay network transaction, a PSE makes a payment in the settlement.

Form-1099-S

The real estate market is well acquainted with the 1099-S. This form is used by anyone who closed a sale, or even an exchange of a property.

Tax reporting can seem to appear as complicated at first, but we hope this article has given you thorough guidance that will make it easier for you to determine which tax forms you need to file.