- January 6, 2021
January is a hectic month for most businesses as they have to file their tax reporting forms. Businesses used Form 1099 to file payments for non-contract laborers, rents, brokerage, and attorneys. Now the IRS recommends them to file separate forms to avoid confusion and tax hikes.
The IRS Form 1099-MISC
As the name suggests, IRS Form 1099-MISC is used to report miscellaneous income by a business that is payable in the course of its trade. Firms use this form to report the following payments they have made to every individual during the tax year.
- Payment of at least $10 in the form of royalties and broker payments.
- Payments of $600 or more as rents, prizes, awards, and other income payments
- Money paid towards fishing proceeds
- Payments made towards healthcare costs
- Payments to an attorney and crop insurance proceeds etc.
The IRS Form 1099-NEC
This 1099-NEC form is for reporting the non-employee compensation by a business. It corresponds to payments made to the contractors who are not on the regular payroll of a business. The Form was in existence till 1982, before it was discontinued. The IRS is bringing back the Form 1099- NEC to protect people from tax hikes. Non-employee compensation covers the following types of payments made to independent contractors.
- Fees paid for both labor and material
- Prizes and awards
- Commissions
- Other compensation made towards services
What is new for the year 2021:
Businesses should not use the MISC Form to report payments made for independent contractors, and instead replace it with the Form 1099-NEC. Before the year 2020, Box 7 of Form 1099-MISC will be used to report non-employee compensation. This box will now be used to report direct sales made for $5000 or above.
Comparison between Form 1099-MISC and Form 1099-NEC:
| Basis | Form 1099 – MISC | Form 1099- NEC
|
| Uses | This form is for reporting only miscellaneous income such as rents and payments for attorneys. | This Form is to report non-employee compensations |
| Items reported | Includes payments made towards royalties and broker payments, rents, and payments made for prizes and awards. | Includes payment made for independent contractors and self-employed individuals and is reported in box 7 of the 1099-MISC form. |
| Where to get the form | The form should be filed with the Internal Revenue Service | This form cannot be downloaded online. It has to be either ordered at the IRS website or filed online. |
| Due dates
|
The due date for filing Form 1099- MISC is March 1, by paper, and March 31 through electronic mode. | The due date for filing the Form 1099- NEC is January 31st |
| Filing procedure | Only one copy of the form needs to be filed with the IRS website. | There should be two copies of the Form, where Copy A will be sent to IRS and Copy B to the contractor |
| Reporting threshold | Reports payments that are $600 and above but for broker payments and royalties, the minimum payout should be $10 and above | Reports payments that are $600 and above |
Businesses should also check their state filing requirements of the two 1099 Forms as it differs between states. And they should make sure to file on time, to prevent late penalties that range from $50 to $100.
