Modern businesses are increasingly relying on independent contractors to fill jobs and essential roles, and 1099 Forms are becoming more and more common on tax returns. However, determining the right 1099 Form to file can be challenging for small businesses thanks to the advent of new form options. So, what is the difference between a 1099 MISC and a 1099 NEC, and how do you know which one to issue? Here’s what you need to know when deciding between 1099 NEC vs MISC.
1099 NEC vs MISC: The Basics
The two most common 1099 Forms are 1099 NEC and 1099 MISC. These forms are very similar, but they also have a few key differences. And, filing the wrong one can cause problems with your return.
Here’s an overview of each of these 1099 options:
Form 1099 NEC: Non-Employee Contractors
The 1099 NEC was created in the 1980s, but it’s become particularly prevalent in recent years. Essentially, Form 1099 NEC shows cash distributions to independent contractors and other non-employee workers.
Businesses typically issue 1099 NECs to freelancers or other contractors who were paid $600 or more in a given year.
However, self-employed individuals who make payments to another individual as a personal service aren’t obligated to issue a 1099 NEC if they’re not a business entity. Only legally established business entities issue this form.
Form 1099 MISC
According to the IRS, you should use 1099 MISC when you pay $10 or more “in the course of trade or business” for gross royalties and for payments of $600 more towards rents and other particular payments.
Generally, you would use this form to show an isolated payment, like a cash prize to a customer.
1099 MISC was the default for self-employed taxpayers before 2020, but now this form’s use is much more specialized and specific.
Most often, businesses issue 1099 MISC forms for one-off expenses. For example, the MISC form can show payments to healthcare practitioners, as well as cash awards and prizes. A business could also issue a 1099 MISC to its landlord for rent payments or to an attorney for legal fees.
The IRS counts these payments as taxable income for the recipient, so they want to know about them. However, the payments aren’t always deductible as regular business expenses, but some 1099 MISC payments, like rent, can qualify as business expenses,
Conversely, 1099 NEC forms show payments to contractors that regularly work for your business who aren’t regular W2 employees.
For example, a magazine publisher will send 1099 NEC forms to freelance writers because they provide regular services for the business. Instead of hiring an employee to do the job, the magazine opted for an independent contractor to fill the need. As a result, a 1099 NEC is the right choice in this scenario.
Alternatively, let’s look at rent payments. It would be unusual for a business to pay their landlord as an employee, so a 1099 MISC form is the appropriate choice.
The qualifying question is, “could a business retain regular employees to perform this service?” If the answer is yes, then a 1099-NEC is usually the correct option.
True, a business could put any job on a salary, but, if the services are not usual or ordinary practice for the business, then the service provider receives a 1099 MISC, not an NEC.
Do These Two Forms Share Any Similarities?
1099 MISC and 1099 NEC have some similarities. They’re both informational IRS returns that declare untaxed payments to US taxpayers, and they both notify tax authorities that the recipient has received untaxed income.
Your payments count as income for the recipients, so the IRS wants to know about it. The 1099 Form let’s tax authorities know that they should expect the recipient to declare the income on their tax return. If the recipient doesn’t report the income, the IRS will know something fishy is going on because they have 1099 Forms on file showing the taxpayer received the payments.
These common traits might make you think these forms are interchangeable, but they’re not. Treating them as if they can cause problems with your return that may result in an IRS inquiry or worse.
When to Issue 1099 NEC vs MISC
These examples can shed some more light on when to use 1099 NEC vs MISC
1099 NEC Usage Examples
- Housekeeping: Workers are responsible for keeping properties clean and comfortable would qualify as a 1099 NEC expense for Airbnb hosts.
- Property management: Property managers perform ordinary and recurring duties for real estate owners. This is a classic 1099 NEC case.
- Web design: Professionals hired to maintain an online presence for marketing purposes should get a 1099 NEC.
1099 MISC Usage Examples
- Office rent: Payments for leased or rented space don’t qualify under non-employee compensation.
- Payments for legal settlement: h
When Are 1099 Forms Due?
Taxpayers must issue and mail out the 1099 forms for the previous tax year by January 31.
Penalties for Missing the 1099 Deadlines
Companies that miss the 1099 filing deadlines are charged between $50 and $270 per form, depending on how delinquent they are. A maximum late fine is $556,500 annually.
If the IRS rules a business intentionally failed to file, each late form costs $550 or 10% of the form’s reported income.
Interested in Fully Managed 1099 Services?
Shared Economy Tax can take the stress out of 1099 time for Airbnb hosts and other small businesses. Our dedicated tax pros will make sure your contractors get the right forms, on time, every time, so you can forget about 1099 NEC vs MISC and get back to what you do best. Get started today with a one-on-one 1099 strategy session with one of our talented tax professionals. And, don’t forget to sign up for our newsletter using the form below for more tax tips.