1099 MISC or 1099 K or 1099 NEC: Did you hire an individual and the payments exceed $600 throughout the tax year? You need to issue a 1099 Information Return Form to the IRS and to the contractor within the deadline.
Getting confused? Which 1099 Tax Return to issue? Don’t worry! We will let you know when do you need to send a contractor 1099 MISC, Form 1099 NEC, and 1099 K. We also provide you information about why to identify the contractor before issuing an information return.
Why identify the individual before issuing a 1099 Tax Form?
As per the IRS norms, 1099 Forms used to report how much money you have paid to a contractor apart from regular salary throughout the tax year. However, the IRS recommends every business individual identify an individual before issuing a 1099 information return. Because employees are treated differently from the contractors. Misclassification of an employee to a contractor may end up paying penalties and fines. The following table helps you in identifying an employee and a contractor:
|An employee performs work related to your business full-time or part-time.
||A contractor works short-term with specialized work related to your business.
|Employers have control over the work done by the employee.
||Independent contractors set their own hours, use their own tools and complete the work.
|The taxes are withheld from an employee from their income.
||The taxes are not withheld from a contractor.
After identifying the work performed by the individual, one can decide which 1099 Form to issue. Typically, business owners file W-2 Form for employees and 1099 Tax Forms for contractors.
What is Form 1099 MISC?
Generally, IRS 1099 MISC used to report miscellaneous income and expenses. Miscellaneous income includes income paid in the form of rent, royalties, broker payments, prizes, and rewards, etc. Figure out the payments made to an individual to issue a 1099 MISC:
- Check whether the payments made to an individual exceed the $600 reporting threshold in a tax year.
- Gather the payments made only on the course of business or trade directly through cash, check, or direct deposit.
- Ensure to recognize the business entity you have paid before you start issuing a 1099 MISC.
What is Form 1099 NEC?
According to the IRS, 1099 NEC Form is the new tax form introduced by the IRS in 2020 to report the non-employee compensation. Furthermore, it recommends the business owners to report the payments made of $600 or more through direct deposit, cash, or check. Non-employee compensation includes prizes or rewards for performing services, fees paid to attorneys for performing legal services, etc.
For example, if you paid an individual $600 for designing a logo for your business. Then the individual is treated as a “non-employee”. As the payments exceed $600, file Form 1099 NEC and report the payments to the IRS.
What is Form 1099 K?
IRS Form 1099 K used specifically to report the payments made through payment cards like debit/credit, PayPal, Square, and Amazon etc. As a business owner, determine whether to issue a 1099 K if your business meets the bellow circumstances:
- Pay a contractor via credit or debit cards.
- Use a service like PayPal, Amazon, or any third-party network to pay an individual.
- Hire a contractor from freelance market places.
- Payment made exceeds $600 in a calendar year.
- The third-party network transactions exceed $20,000 with 200 transactions in a tax year.
What happens if you file a wrong 1099 information returns to the IRS?
In general, to report all the payments that a business made to an individual on a correct 1099 information return. This is because the IRS uses 1099 Tax Forms to check whether the contractors are reporting their 1099 income correctly on their tax returns. If you report an incorrect amount or file a wrong form, the IRS may subject you to pay penalties along with interests. Hence, it is important to file a correct 1099 Tax Form to the IRS and to the contractor.
Ready to file 1099 Forms? Which method you would choose paper filing or e-filing? The IRS recommends every filer file 1099 Tax Forms online. Form 1099 Online is the IRS authorized e-file provider. Choose us to submit your tax returns with 100% accuracy to the IRS.