Form 1099-NEC and Form 1099-MISC: What to Report and How to Report It

Businesses already have a pile of tax documents to submit every year, but here comes another. Form 1099-NEC is now a regular part of the tax preparation process for companies since its reinstatement in 2020.

Form 1099-NEC is used to report non-employee compensation – so it’s no longer reported on 1099-MISC.

This change is relevant to any business that relies on non-employee services, such as freelancers or independent contractors. Transactions with these parties must be reflected on Form 1099-NEC, and there are severe penalties for failing to do so.

Who Must File a Form 1099-NEC and When is it Necessary?

A 1099-NEC is necessary whenever a business entity pays a non-employee $600 or more over the course of a single tax year, and that payment is for business purposes only. The deadline to file the form with the IRS and provide it to the payee is January 31 (for the 2022 tax year, the deadline was January 31, 2023). Organizations held to the $600 rule include:

• Any business entity, from corporations to sole proprietorships. To be considered a business entity, you must be engaged in activity for gain and profit.
• Nonprofit organizations.
• Trusts of qualified pension or profit-sharing plans of employers.
• Some section-501 tax-exempt organizations.
• Farmers’ cooperatives tax-exempt under section 521.
• Widely held fixed investment trusts.

Reportable payments include fees, commissions, awards, and prizes for services rendered. In addition, the following must be reported if it is in excess of $600:

• Professional service fees, including those paid to attorneys, accountants, architects, contractors, or engineers. Directors’ fees also apply.
• Fee-splitting or referral fees paid by one professional to another.
• Service exchanges, if both are in the course of the others’ business.
• Oil and gas payments for a working interest, whether or not services are provided.

Form 1099-NEC (or Form 1099-MISC) can also be used to report any direct sales of $5,000 or more of consumer products, if they are sold to a buyer for resale purposes outside of a permanent retail establishment.

Personal payments are not reportable. As such, it’s critical that businesses pay for services using a business account rather than a personal account.

Finally, organizations must provide a 1099-NEC for anyone that the organization has withheld income from, for the purposes of income tax withholding under the backup withholding rules. This applies to every payee regardless of the amount of payment.

What Payments Do Not Need to Be Reported on a 1099-NEC and Are There Any Exceptions?

In general, payments made to any corporation (S-corps, C-corps and LLCs adopting a corporate tax structure) do not need to be reported on a 1099-NEC or 1099-MISC, but there are a few exceptions. They include:

• Medical and healthcare payments
• Gross proceeds paid to an attorney
• Cash payments for fish intended for resale
• Substitute payments in lieu of dividends or tax-exempt interest

An attorney – for the sake of determining gross proceeds – also refers to a law firm or other provider of legal services. Attorney’s fees exceeding $600 are reportable in box 1 on Form 1099-NEC.

Some attorney-related fees may need to be reported on 1099-MISC instead. In box 10 of this form, report any payment that meets the following requirements:

• Is in excess of $600
• Is made to an attorney in the course of your trade or business in connection to attorney services, but not for attorney’s services themselves. A settlement agreement, for example, would apply here.
• Is not reportable in box 1 on Form 1099-NEC

What is Form 1099-MISC and When Must One Be Filed?

Form 1099-MISC briefly served as the primary reporting document for non-employee compensation. That’s Form 1099-NEC’s job again, but there are still several types of non-employee payments that must be reported on 1099-MISC, if they exceed the $600 threshold. They include:

• Rent
• Medical or healthcare payments
• Crop insurance proceeds
• Cash paid from a notional principal contract to an individual, partnership or estate
• Gross proceeds paid to an attorney
• Fishing boat proceeds
• Cash payments for fish, paid to anyone engaged in the trade or business of catching fish
• Nonqualified deferred compensation
• IRC Section 409A deferrals

Like with Form 1099-NEC, a 1099-MISC must be provided to the IRS and payee whenever income is withheld for income tax reasons, if held using backup withholding rules. This applies to any payment, not just those exceeding $600.

A Trusted Houston TX Tax Professional Can Help Their Clients File 1099s Faster and Accurately

Tax preparation is notoriously complicated, with enough paperwork to overwhelm many small business owners. Confusion also persists with Form 1099-NEC and 1099-MISC reporting, given recent changes to both forms.

If your organization relies on non-employee services for operations, this confusion can lead to filing mistakes and missed deadlines, which can result in severe penalties. A Houston TX tax preparation expert, ideally experienced in business accounting, can ensure 1099s are provided on time to federal agencies and payees. They can also verify information included on all 1099s and alert clients to any reporting discrepancies.

There are severe penalties for an incorrect or incomplete 1099 filing, so prepare accordingly

If 1099s are not filed and provided to payees by the due date, and if reasonable cause cannot be demonstrated, penalties may be assessed. The penalty for late filing is $50 per form, at the minimum. Maximum penalties run up to $588,500 per form. Also, if taxpayers intentionally disregard filing requirements, a minimum of $580 penalty per form is assessed, with no maximum limit.

Penalties may be applied for either filing 1099 information incorrectly to the IRS, or providing an incorrect 1099 to payees. It’s possible, then, for taxpayers to be double penalized for each incorrect form.

These penalties can mount quickly, especially if your organization leverages non-employee talent heavily. To ensure your organization is on top of its 1099 reporting, and to ensure it avoids any associated penalties, consider partnering with an experienced Houston TX business tax professional.