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.