Neck pain while reviewing payroll tax deductions

When to use the Form 1099-NEC
Independent Contractors - Non Employee Compensation Requirements

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by L. Kenway BComm CPB Retired

Published June 8, 2024

Difference between 1099-NEC vc 1099-K vs 1099-MISC | Form 1099 thresholds | Completing 1099 forms | Form 1099-NEC Highlights | Form 1099-K Highlights | Form 1099-MISC Highlights | How Commercial Contractor Registration and W-9 affect 1099 forms | FAQ About 1099 Reporting | Key Takeaways

IRS Form 1099-NEC vs 1099-MISC vs 1099-K: What's The Difference

Generally a 1099 form is an IRS tax form that documents payments made a business, an individual, or an entity that is not an employee. Your task, as a small business owner, is to figure out the correct 1099 to file with the IRS by January 31st each year.

IRS introduced the form 1099-NEC Non Employee Compensation for the 2020 reporting of independent contractors compensation paid. Previously it had been reported in Box 7 of the Form 1099-MISC Miscellaneous Information. It can get confusing when you also consider the Form 1099-K Payment Card and Third-Party Network Transactions introduced in 2012.

Let's chat about the reporting requirements for non-employee compensation. If you are unsure whether someone is considered an employee or an independent contractor, please read my chat on the topic as it is a frequently audited area. A mistake in classification could be very costly to the employer.

Form 1099 Thresholds Are Changing

  1. Implementation of The American Rescue Plan Act of 2021 legislation has been delayed two years in a row that would change the 1099-K threshold to $600. A $5,000 phase-in was proposed by IRS Notice 2023-74 on November 21, 2023 with the goal of eventually reducing it to $600.
  2. H.R. (House of Representatives) 7024 Tax Relief for American Families and Workers Act of 2024 passed in January 2024 and has now gone to the Senate. If passed into law, the thresholds for:
  •  1099-MISC and 1099-NEC will change from $600 to $1,000 for payments made in 2024. Future years would be tied to inflation.
  • Direct sales threshold would change form $5,000 to $1,000.

Completing 1099 Forms

  1. When completing any IRS Form 1099, always use the individual's legal name for a sole proprietorship or independent contractor.

    However, if the business operates under a DBA (doing business as), use the DBA name on the Form 1099.

    When preparing the Form 1099 for a business or partnership, use the entity's name.

  2. Even if you paid the Independent Contractor by credit card, PayPal or Venmo, you may still need to send a 1099-MISC for any amount paid by cash/cheque if the criteria (see side bar above) is met.

    Does this mean that some payments will not be captured on either the 1099-NEC, 1099-MISC or 1099-K? Yes but not your problem. Why? You don't know if the IC will receive a 1099-K. You don't know if the IC had over $20,000 in sales and over 200 transactions ("old" rules before 2024).

    Editor's Note: Effective for 2024 payments, the threshold for 1099-K REPORTING will be a $600 threshold. 2022 and 2023 will be transitional years and will follow the "old" rules. IRS has a March 12, 2024 webinar on YouTube titled Form 1099-K Third Party Payment Network Transactions you may want to watch.

  3. If you hire ICs, you want to be up on your independent contractor rules. A good place to start was the IRS webcast on 1099 MISC Filing requirements at However, this portal has been shut down and the IRS now uses IRS YouTube to post its webinars. It's very unfortunate as  they don't seem to be converting the old webinars to the new platform so a lot of good information is gone.

    The transcript said it will cover "your responsibilities for filing Form 1099‑MISC and the corresponding Form W‑9. We will be discussing reporting of rents, nonemployee compensation, royalties, other income and gross proceeds to attorneys." Backup Withholding was also discussed including how to deposit it.

    As the link to this webinar is no longer available, your best bet is the IRS website on Reporting Payments to Independent Contractors

    As of 2020, non-employee compensation is no longer reported in box 7 of the Form 1099-MISC. It now gets reported on Form 1099-NEC.

  4. Payments are reported on a calendar year not a fiscal year.

  5. Report any incorrect information on a 1099 form to the IRS as soon as possible.

Sources: IRS & AIPB & Tax

Form 1099-NEC Highlights

Why Does The IRS Require A Form 1099-NEC?

Under current law, only payments for services to any person engaged in business or trade that aggregated to $600 plus per year are reported. Until 2020 (2019 tax year), this income was reported on various 1099s including the 1099-MISC and 1099-K. The IRS introduced the 1099-NEC in 2021 for the 2020 tax year but implementation has been delayed for 2022 and 2023.

One of the ways the IRS audits independent contractors is through the 1099 matching program. The IRS began matching Form 1099s to business returns to find underreported income. The matching was done after refunds had been issued. As refund fraud increased, the issue was addressed by the 2015 PATH (Protecting Americans from Tax Hikes) Act to fight against it. 

In 2017, the IRS began scrutinizing income reported by matching it to 1099s filed before they issued a refund. This quick audit method is low hanging fruit and easy to audit thereby decreasing refund fraud while increasing its enforcement and assisting with the filing of more accurate tax returns. To allow for upfront matching, the IRS changed the required 1099s to be filed by January 31st instead of February 28th.

Letter CP2000 Notification of Underreported Income is sent if the information is mismatched. Find out why you received the notice and how to proceed before you reply.

Who Should Receive the 1099-NEC?

Here is a brief overview of 3 general rules about who should receive the 1099-NEC:

General Rule #1 Services Only: 

Only required for services delivered, NOT product or materials, to your business are reported. This means (a) personal payments (such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill) and (b) wages to employees are not reported here.

General Rule #2 More Than $600:

Only payments that total $600 or more that were PAID DIRECTLY TO AN INDIVIDUAL are reported. An individual would be a sole proprietor, independent contractor, freelancer, a self-employed person, consultant, or a vendor.

In addition, any suppliers who do not file a corporate return are reportable. You need to ensure you have a W-9 on file to determine if an LLC requires a 1099-NEC or not because they have the option to file as a sole proprietor / partnership or as an S-Corp.

General Rule #3 Paid Through Bank: 

Only payments made by cash or payments made through your bank account such as cheques, debits or ACH are reportable. 

Exception to the Rules:

Avalara*, experts in sales and use tax, explains that "Form 1099-NEC (or the 1099-MISC but not both) can also be used to “report sales totalling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale.”

General Rule*:

 Issue Form 1099-NEC to all law firms, regardless of their tax filing status

*Source: House approves new thresholds for 1099 forms by Gail Cole; 1099 Rules for Attorneys and Law Firms by LawPay

Who Should Not Receive the 1099-NEC?

  • Payments to corporations are not reported on the 1099-NEC; this includes LLC, S Corps, and C Corps.
  • Wages paid to employees
  • Employee business travel allowances paid under an non-accountable plan (this goes on W-2 and is subject to applicable federal employment taxes)
  • Expense reimbursement under an accountable plan are not taxable or reportable
  • Freight, storage, or merchandise payments
  • Real estate agents are not considered individuals for these purposes so do NOT report rent paid to real estate agents.
  • Commercial Contractor Registration or W-9 (captures TIN (taxpayer identification number), etc. when a person or entity is required to report certain types of income)
  • Payments made through a third party provider such PayPal, Venmo, or a credit card provider will be captured on Form 1099-K by the third party. You do not need to report amounts under the 1099-K threshold is 200 transactions and at least $20,000 in total payments. 

1099-NEC Yearend Tax Compliance Reminder
for Independent Contractors 

  • As of the 2020 tax year, you now use Form 1099-NEC to report independent contractor payments instead of the Form 1099-MISC (box 7) as in prior years.
  • Form 1099-NEC should be presented to service contractors before February 1, 2021. IRS receives Copy A, the contractor receives Copy B, and you retain Copy C for your records to support your subcontractor expenses.
  • You may file the forms using a truncated taxpayer identification numbers (TTIN) ... the first five digits are replaced with an "x" or "*" ... to prevent identity theft.
  • The IRS receives Form 1096 Annual Summary and Transmittal of U.S. Information Returns AND Copy A by March 1 ... March 31 if filed electronically.
  • To send the 1099s by email requires the explicit permission of the contractor.
  • Annual Return Form 945 Withheld FIT is used to report non payroll payments including WFIT. on Form 1099 is also due January 31, 2021.

As Robert Wood, tax lawyer and Forbes columnist likes to say, "It's better to give than receive." :)

Source: The Bookkeeper's Notes Newsletter

Key Takeaway Form 1099-NEC

✅ Do This

  • Ensure you file it for any non-employee receiving $600 or more during the fiscal year
  • Remember the January 31st deadline for both the IRS and the recipient.
  • Electronically file if distributing 250 or more forms.
  • Ensure you have a W-9 on file. A W-9 (captures TIN (taxpayer identification number), etc. when a person or entity is required to report certain types of income.

❌ Not This!

  • Don’t use Form 1099-MISC for non-employee compensation after 2019.

Form 1099-K Highlights

How The IRS Knows You Didn't Report Income

The IRS has many ways to determine if they suspect you have unreported income. Here are a few:

  • Information statement matching where forms 1099, W-2, etc are matched to your personal income tax returns filed with IRS.
  • Comparing your business financial ratios with similar businesses. (Check out BizStats to see how your business compares.)
  • Website e-commerce activity are matched to 1099-K forms are matched to your business income reported and filed with the IRS.
  • Bank deposit analysis where they look at all the monies deposited to you and your family members' bank accounts.
  • Lifestyle audits, also sometimes referred to as T-account analysis, where they compare reported income to personal expenditures. It's not good for you if they resort to this type of audit.

In 2012, they targeted unreported online income by introducing the Form 1099-K Payment Card and Third-Party Network Transactions. The legislation for this was enacted in 2008. Processors of credit card and debit cards such as Visa and Master Card as well as electronic payment systems like PayPal and Venmo are required to report the gross receipts of payments made to businesses. This reporting did not affect cash receipts.

As mentioned earlier, this is a quick audit method that catches low hanging fruit. It is easy to audit which decreases refund fraud and increases its enforcement. This matching program assists with the filing of more accurate tax returns.

What Is The Form 1099-K and Who Should Receive?

The form 1099-K Payment Card and Third Party Network Transactions details payments received through payment card transactions and third-party network transactions that meet or exceed both 200 transactions and $20,000 in gross total reportable payment volume.

It’s generally filed by third-party payment processors like PayPal, Stripe, or Square. If you’re a business owner, you’ll receive a 1099-K form each year, summarizing your transaction details if you exceed the stated thresholds.

Filing is typically handled by the payment processing service. As a merchant, ensure your business information is up-to-date in these services to receive accurate and timely forms.

What To Do If You Receive A 1099-K?

If you receive a 1099-K, insure these amounts are included in your income to the IRS.

Key Takeaway Form 1099-K

✅ Do This

  • Check personal business information for accuracy on these platforms.
  • Verify the sum of the payments against your own records to prevent discrepancies that might trigger an audit.
  • Keep detailed records of all transactions, including invoices, contracts, and communication, to support your filings and clarify any discrepancies during an IRS audit.

❌ Not This!

  • Don’t ignore errors in transaction reports; they can lead to misfiled taxes and possibly trigger an audit.
  • Third party processors are essential for businesses processing a significant volume of payments through online activity. Don't stop using them just because you might receive a form 1099-K.

Form 1099-MISC Highlights

What Is The Form 1099-MISC and Who Should Receive?

The form 1099-MISC Miscellaneous Income used to be used for reporting of independent contractors compensation paid. Since 2020, these payments are now reported on Form 1099-NEC. This reporting change did not make the 1099-MISC go away. It is still used for various forms of alternative income like rents, prizes, awards, healthcare payments, and other payments not involved with non-employee compensation.

You need to file Form 1099-MISC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount, or for whom you have paid at least $10 in royalties or $600 in rents, services (other than nonemployee compensation), prizes, awards, or other income payments.

Filing can be filed by paper or electronically. Check whether your specific payer software supports electronic submissions to simplify the process.

What To Do If You Receive a 1099-MISC?

As with the other 1099 forms, if you receive a 1099-MISC, insure these amounts are included on the appropriate line when filing your income tax return with the IRS.

Key Takeaway Form 1099-MISC 

✅ Do This

  • File a Form 1099-MISC for each instance of miscellaneous income over $600.
  • Pay attention to different deadlines depending on the type of payment.
  • Keep detailed records of all transactions, including invoices, contracts, and communication, to support your filings and clarify any discrepancies during an IRS audit.

❌ Not This!

  • Don’t confuse it with 1099-NEC which is now used for reporting non-employee compensation.

Commercial Contractor Registration and W-9s

What is a W-9?

This form is used by businesses to gather information from contractors, freelancers, or vendors from whom they will need to report payments for federal tax purposes.

When a business entity hires these non-employees, they are required to fill out a W-9, which provides the business with necessary details such as the contractor's name, address, and Taxpayer Identification Number (TIN), which is typically a Social Security Number (SSN) or Employer Identification Number (EIN).

More >> Form W-9 and Form 4699

For individuals, such as freelancers or contractors, who complete a W-9, the information provided is used by the business to file a 1099 form. For example, Form 1099-NEC is used to report payments of $600 or more in the course of the year to a non-employee.

Their completion of the W-9 should provide doucumentation to prove if the entity is exempt from a 1099-NEC filing.

In practice, both a W-9 and a 1099-NEC are usually necessary for the reporting process but serve different roles. The W-9 is used to collect the needed identification data, which is subsequently used to fill out and submit a 1099-NEC when it comes time to report payments made.

What is Commercial Contractor Registration?

This term usually  refers to a required registration process for contractors who work for commercial entities, often regulated at the state level.

The specific rules and requirements varies depending on the state. Typically, this involves registering with a state contractor's board or similar regulatory body, often necessary for legal operation and bidding on contracts.

The Commercial Contractor Registration in itself doesn't directly interact with IRS forms like W-9 and 1099. However, maintaining proper registration and compliance affects a contractor’s business operations, including their eligibility to receive payments, which in turn, require reporting through IRS forms.

Contractors must be registered (where necessary) and compliant to facilitate their tax obligations, such as those involving the submission of Form 1099s by their clients based on the information provided in W-9 forms. Their registration should show if the entity is exempt from a 1099-NEC filing.

Key Takeaway

✅ Do This

  • Require a contractor to fill out a W-9 when beginning a relationship with a your business.
  • Ensure the W-9 information is correct as your business uses this information to properly fill out a form 1099-NEC form when reporting to the IRS.
  • If you can't reach a vendor to get their W-9 information, it is recommended you make several attempts using the same email thread or log your calls or text messages. Save these as proof your business did its due diligence in attempting to issue a form 1099-NEC.
  • The Commercial Contractor Registration, on the other hand, is more about the licensure and legal status of the contractor which indirectly impacts tax and payment processes managed through forms like W-9 and 1099-NEC.
  • Use the Central Contractor Registry (I believe it's also called IRS TIN Matching) for TIN matching. Make this part of your onboarding process. DUNS number is public information, EIN is not. TIN matching reduces IRS fines and saves you admin time. I found a 2010 guide to the system here. It's an old version but maybe it can help you find a more current version.

❌ Not This!

  • Don't pay a vendor if they have not provided you with a completed W-9.
Answers To Your Bookkeeping Questions

FAQ About 1099 Reporting

These Q&A are a direct excerpt from the "Common Questions" section of an IRS 2011 webinar on Form 1099 Reporting for Federal Agencies. I believe the responses provided are still valid in 2024.

What if a vendor provides service part of the year under one TIN then provides the remainder under another?

Depends on W-9 entity information

  • If sole proprietor gave SSN & now gives EIN without change of entity type, use SSN, put individual’s name on 1st line of 1099 and business name on 2nd line.
  • If changing from sole proprietor to corporation or if company has changed hands, issue separate 1099s.

What if a vendor is exempt and I inadvertently sent a 1099?

Prepare a new 1099

  • Enter “X” in the “CORRECTED” box
  • Enter payer, recipient, and account no. exactly as it appeared on the original incorrect 1099
  • Enter zero money amount in correct box

Where do I send the information returns?

Internal Revenue Service Center listed for your area on the Form 1096 Instructions (250 or more magnetic media).

Can I file an extension to file Forms 1099?

Yes! Send Form 8809 to the address shown by Jan. 31 for a 30 day extension.

What if I can’t get a Form W-9 or the Form W-9 information from the recipient?

Backup withholding applies. Backup withholding is income tax withholding at the source for non-payroll types of payments and compensation. In 2024, it 24%. It begins immediately if

  • Payee was paid more than $600 in prior year and an information return was issued, or
  • Payee was subject to backup withholding in the prior year.

Backup withholding is reported on 1099-NEC box 4 and/or box 5. Form 945 is used to report and pay backup withholding to the IRS. These should be separate from form 941 deposits.

How long do I keep copies of information returns?

Three years from the due date, unless backup withholding applies (4 years).

Can I use photocopies of Forms 1099?

No. You can get official forms at IRS offices or by calling 1-800-TAX FORM

How about substitute Forms 1099?

Yes, if they meet the requirements of Publication 1179

Key Takeaways

  • Since 2020, Form 1099-NEC Non Employee Compensation is for the reporting of independent contractors compensation paid over $600 in a calendar year.
  • Since 2012, Form 1099-K Payment Card and Third-Party Network Transactions details payments received through payment card transactions and third-party network transactions that meet or exceed both 200 transactions and $20,000 in gross total reportable payment volume.
  • The Form 1099-MISC Miscellaneous Income is still used for various forms of alternative income like rents, prizes, awards, healthcare payments, and other payments not involved with non-employee compensation.
  • Thresholds for all three forms are expected to change in 2024 or 2025.
  • The Form W-9 and the Commercial Contractor Registration are usually necessary for the reporting process. The information collected (and verified) is used to complete your 1099 forms.
  • The deadline for 1099 forms is January 31st. Payments are reported on a calendar year basis.
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