Form 1099 is an informational tax return that reports income to the IRS from sources other than wages, salaries, and tips. Common activities that require reporting via 1099 include paying contractors, paying a landlord for office space, and paying royalties—to name just a few.
While there are many types of 1099 forms, there are three main variations that frequently come into play for business owners: Form 1099-NEC, Form 1099-MISC, and Form 1099-K. The right form to use usually depends on what kind of payments you made and how you paid them. We’ll break down the differences between these three main forms, explain when to use them, and more below.
Employees vs. contractors
One of the main uses for 1099 forms is to report how much money you’ve paid a contractor over the course of a year.
Remember: the IRS treats employees and contractors very differently, and it’s important to make sure you classify all of your workers correctly—otherwise you could pay a hefty fine. In general:
- Employees often perform more essential work for your business. You also usually have more control over employees and are able to set their hours, pay, and other details of the job. Typically, you have them sign an employment agreement before they officially start working for you, and you’re in charge of providing tools and resources to help them do their job.
- Contractors usually perform more short-term, specialized work. They typically set their own hours, use their own tools, charge hourly or project-based fees, and sign an independent contractor agreement that details the terms of their work.
If you’re not sure how to classify a worker, fill out Form SS-8, and the IRS can help you establish whether they’re an employee or contractor.
Once you know what type of worker you have, you can determine which forms you may need to report their pay. With employees, you typically file Form W-2. With contractors, you usually file Form 1099-NEC or a third party files Form 1099-K—depending on how you paid the contractor. We’ll get into the details below.
What is Form 1099-NEC?
Form 1099-NEC is an informational tax form used to report nonemployee compensation (NEC) of $600 or more that was paid via check or direct deposit over the course of the calendar year. If you paid your contractor(s) via credit card, debit card, or a third party settlement platform (like Paypal or Venmo), be sure to read about the 1099-K, below.
Prior to 2020,you’d report payments to contractors via Form 1099-MISC. However, the IRS recently changed things up and now requires you to report most non-employee income via Form 1099-NEC instead (starting with the 2020 tax year). They made this change to make it easier to know when to file—since you can report a variety of payments using Form 1099-MISC, some of which have differing filing deadlines, switching to one form and one deadline simplifies the process of reporting this common payment type.
If you paid any nonemployee (such as an independent contractor) at least $600 over the calendar year for their services in the course of your trade or business via check or direct deposit and they’re not classified as a corporation, you’re responsible for a few things:
- File Copy A of Form 1099-NEC with the IRS by January 31 (or the next business day if it falls on a weekend or holiday). Like other tax forms, you can either file electronically via the IRS FIRE system or mail it to your local Department of the Treasury Internal Revenue Service Center. Note: if you mail a physical copy, you’ll also need to file Form 1096, which tracks every physical 1099 you’ve filed.
- Send Copy B to your contractor by January 31 (or the next non-holiday business day) so they can report the amount on their tax return.
- Send a copy to your state and/or the state(s) where your contractor resides or works (if they require a copy). 1099-NEC isn’t part of the IRS 1099 Combined Federal/State Filing Program, so the IRS won’t automatically send it to the states participating in the program.
What is Form 1099-K?
Form 1099-K is an informational tax form used to report transactions made via payment cards (such as credit cards or debit cards) and third-party “payment settlement entities” (PSEs), such as PayPal, Square, and Amazon.
While you usually use Form 1099-NEC to report payments to contractors made via check or direct deposit, Form 1099-K could come into play if you:
- Paid your contractor via credit or debit card
- Used a service such as PayPal or Venmo to pay your contractor
- Hired your contractor through a freelance marketplace such as Upwork or Fiverr
Unlike Form 1099-NEC, you don’t have to fill out, file, and issue the 1099-K yourself. Instead, you may need to share the contractor’s name and information with the third party, who is responsible for filing the 1099-K with the IRS and giving your contractor a copy.
Your business may also receive a 1099-K if you used a PSE to make both of the following:
- More than $20K in gross sales from goods or services in the calendar year
- More than 200 transactions in the calendar year
However, states can have lower thresholds—for example, Massachusetts, Vermont, and Virginia currently require 1099-Ks if you process $600 or more in gross sales. Additionally, some PSEs may issue you a 1099-K even if you’ve only processed one transaction with them.
Sometimes, payments may show up on both Form 1099-MISC and Form1099-K. However, the IRS makes it pretty clear that most payments via payment cards and PSEs should be reported via 1099-K—according to the 1099-MISC instructions, “Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.” To avoid double taxation, keep track of your sales and deduct duplicate payments on the 1099-MISC from the 1099-K.
Form 1099-Ks are due to the payees (such as your business or contractors) by January 31 and are due to the IRS by February 28 for paper filing or March 31 for electronic filing.
What is Form 1099-MISC?
Form 1099-MISC is an informational tax form used to report “miscellaneous” income and expenses. As the name implies, you can report a variety of different payments using 1099-MISC, including royalties or broker payments, rent, prizes and awards, medical and healthcare payments, payments to an attorney, and more.
If you’ve ever paid contractors more than $600 in a calendar year, you probably recognize Form 1099-MISC as the form you previously used to report those payments. However, as of the 2020 tax year, the IRS requires you to report most nonemployee compensation via Form 1099-NEC instead.
To figure out whether you need to fill out Form 1099-MISC, make sure you know:
- How you paid the payee: If you paid an individual via credit card, debit card, or a third-party payment settlement entity such as PayPal or Square, you probably don’t need to report those payments via 1099-MISC. Instead, the card issuer or third-party network is likely responsible for issuing a Form 1099-K.
- What you paid them for: If you paid a contractor at least $600 over the calendar year for their services in the course of your trade or business via cash, check, or direct deposit, you probably don’t need to report that via 1099-MISC. Instead, you likely need to issue Form 1099-NEC. If you want to report miscellaneous expenses, such as medical payments or attorney fees, 1099-MISC is a good bet.
- What type of business entity they are: If you paid another business, you likely don’t need to issue Form 1099-MISC to report those payments. 1099-MISC is generally meant for individuals, not corporations.
If you do need to file Form 1099-MISC, keep in mind that the IRS rearranged some of the box numbers of Form 1099-MISC when they reintroduced 1099-NEC, so be sure to fill out and submit the latest version.
You’ll need to send a copy of the 1099-MISC to the payee by January 31 or the following non-holiday business day and file Form 1099-MISC with the IRS by March. If you file by paper, it needs to be postmarked by March 1 (and you also need to file Form 1096). If you file electronically, your deadline is March 31.
Which 1099 form do I need?
With so many 1099 variations out there, it can be hard to figure out which one(s) apply to your situation. Here’s what you should know at a glance:
|When it’s generally used||To report transactions (such as payments to contractors) made via credit cards, debit cards, or third party payment settlement entities||To report miscellaneous income and expenses, such as rent||To report compensation to nonemployees (such as independent contractors) totalling more than $600 over the course of a year made via check, direct deposit, etc.|
|Who needs to fill it out||The payment card network or payment settlement entity used to process payment card transactions||Your business||Your business|
|Who needs a copy||IRS, payee, and potentially your state||IRS, payee, and potentially your state||IRS, payee, and usually your state|
|When it’s due to the payee||January 31 (or the next non-holiday business day)||January 31 (or the next non-holiday business day)||January 31 (or the next non-holiday business day)|
|When it’s due to the IRS||Paper filing: February 28|
Electronic filing: March 31
|Paper filing: March 1|
Electronic filing: March 31
|January 31 (or the next non-holiday business day)|
|How to file with the IRS||Mail it or submit it electronically through the FIRE system||Mail it (along with Form 1096) or submit it electronically through the FIRE system||Mail it (along with Form 1096) or submit it electronically through the FIRE system|
What happens if I use the wrong form?
It’s important to use the right form so each party can file their taxes correctly. If you file the wrong form, you may have to pay a penalty for each form you file past the due date and a separate penalty for giving the wrong statement to your contractors. The penalty amount can vary based on when you file the correct form and get the correct information to your contractors.
To fix your mistake, don’t just file the correct form and assume the IRS will know which one to count—you’ll usually need to void your original form and submit the correct form instead.
Running a business tends to come with a multitude of tax forms, but there are a few things you can do to better your odds of getting things right.
First, educate yourself around the common forms that come into play for business owners. Secondly, keep track of the various filing deadlines and keep good records in case the IRS has any questions. Finally, consider using a service that can help make sure you stay compliant.
At Gusto, we can fill out 1099s for you and make it easy to send them to the correct people and entities. Check out our demo to learn more.