1099-NEC and 1099-MISC Forms: Who Gets Them and What to Look Out For
A lot of things changed in 2020—we all know that. What you might not know is that those changes included some IRS updates to the 1099-NEC and 1099-MISC forms used to report nonemployee compensation.
If you receive compensation from a company you're not employed with, or your company hires contractors or freelancers, you'll need to be up to speed on these changes. You should also be aware of how contractual language (or lack thereof!) can affect what forms you receive and what taxes you're responsible to pay.
Read on to learn more.
What is a 1099-NEC and Who Gets One?
While the 1099-MISC used to be sent to all independent contractors, now this income will be reported on the 1099-NEC. Note that this doesn't include employee compensation, which is still reported on W-2 forms.
If your business did the following…
Worked with people not on your payroll, and
Paid those people more than $600
…you'll need to file a 1099-NEC and send the contractors a copy.
There is an exception to the rule for S-Corps, however. You do not need to file 1099-NEC forms for them, and they are not individually responsible for the self-employment taxes. We'll talk more about this, and why it matters, shortly.
What is a 1099-MISC and Who Gets One?
The 1099-MISC form is still used for almost everything it was in the past—just not contractor payments.
That means you'll still use a 1099-MISC for things like:
Rent
Legal services
Prizes and awards
Other income payments
Medical and health care expenses
In contrast to the 1099-NEC, which is due to your contractors at the end of January, the 1099-MISC is due March 1 or 31, depending on how you file.
Protect Yourself By Carefully Reviewing Contracts
To illustrate why you'll want to thoroughly pore over your contracts before signing (a good idea in any situation!), let's recap the 2016 tax court case of Fleischer v. Commissioner of Internal Revenue.
Mr. Fleischer was a certified financial planner who had an S-Corp called Fleischer Wealth Plan (FWP). However, he signed contracts in his role as an independent contractor under his name with two different businesses that later sent him 1099-MISC forms.
Because Mr. Fleischer didn't spell out that his S-Corp was entering into the agreement or that he'd be funneling the money from himself to the S-Corp, his receipt of the 1099-MISC documents meant he'd be responsible for the associated self-employment taxes.
Mr. Fleischer was unaware of this blunder. In his record keeping, he listed the amounts on the 1099-MISC under his S-Corp business and claimed nothing on his individual taxes.
As you can imagine, the IRS got involved and alleged that Mr. Fleischer did indeed owe self-employment taxes because he entered the agreements as himself and not FWP, his S-Corp.
The Tax Court agreed, citing case law that outlined Mr. Fleischer (and not his business) was the proper recipient of the income.
What does this mean for you? Well, if you're receiving non-employee compensation that you want to fall under your company, it is the best practice making sure your contracts explicitly detail the relationship between the company paying you and your own business. Also, make sure you fill out an accurate W-9 form and provide it to the vendors paying you.
Make companies aware of your S-Corp, if you have one, and have the name of your S-Corp reflected in the contract.
If this all sounds a bit complex, that's because it is! It's advisable to consult with a professional to be sure you're covering your bases.
Modis Advisors Can File the Correct Forms for Your Business
If you've got questions about 1099-NEC, 1099-MISC or independent contractors, our team can help. We provide filing services that will ensure your forms are sent on time. All we need from you is an accurate record of your payments to contractors, freelancers, and independent workers.
Contact us to learn more.