Wading through the bureaucracy of IRS forms, and knowing which are the right forms you need to fill out, is a necessary part of doing business. It can be so frustrating, you just want to throw your hands in the air and hire someone else to do your tax returns.
But taking a little time to understand what you need to fill out and what you need to avoid can be the difference between a smooth tax return and an arduous one. Even if you end up hiring an accountant for your small business, at least you’ll have a fundamental understanding of the tax code, and can provide your accountant with more relevant information pertaining to your business.
In this article, we’ll look at and compare the 1099-NEC and 1099-MISC forms, and which one you should use for your business.
Who Receives 1099 Forms?
On a basic level, a 1099 form is issued to anyone who received more than $600 in “wage income” during the tax year. However, there are actually many different types of 1099 forms – Keepertax.com, so the one you receive (or need to send out to employees) will depend on numerous factors, including:
- The type of income you receive.
- Whether you are a sole proprietor or a corporation.
- The type of income you earned, including your salary, tips, independent contractor income, dividends, and capital gains
- Any payments or perks you might have received, such as health insurance, healthcare discounts, life insurance, retirement savings, or mortgage interest.
So while there’s a rather extensive list of 1099 forms, we’ll be focusing specifically on the 1099-NEC and 1099-MISC for the purpose of this article.
What is the 1099-NEC?
The 1099-NEC is for reporting employment income that was earned outside of typical W-2 wages, meaning it can apply to earnings from freelance work, independent contracting, or services rendered for an entity that you are not an employee of.
In other words, it is a form for reporting income (or payments) that are not in the form of W-2 wages. There are some regulations that will determine whether or not a 1099-NEC form is necessary, which include:
- The payment is for services and not products.
- The services rendered have a business purpose.
- You work with an LLC sole proprietorship.
It’s important to note that you don’t need to issue 1099-NEC forms to C and S corporations, but with some exceptions. You may still need to issue 1099-NEC forms to S or C corporations if payments were made for:
- Medical and health care.
- Attorney and law fees.
- Substitute payments for dividends and tax-exempt interests.
Essentially, businesses must issue 1099-NECs to any non-employee they have paid more than $600 for services (not products, an important distinction).
What is the 1099-MISC?
The 1099-MISC is for some types of untaxed income that wasn’t in the form of W-2 wages. This mainly applies to all forms of self-employment income, but can also apply to other scenarios.
Like the 1099-NEC, this form is necessary when payments involved are $600 or more. Some of the scenarios where you may need a 1099-MISC include:
- Prize winnings, such as raffles and gambling winnings.
- Payments received from foreign financial institutions to your U.S. bank account.
- Purchasing and reselling goods worth at least $5,000.
Is 1099-NEC necessary if I purchased products/software as a service?
While there is a clear distinction between products (goods) and rendered services, the rising concept of products-as-a-service (and SaaS, software-as-a-service) can make things confusing, because the 1099-NEC is not used for payments made on products.
Because a product-as-a-service, and also software-as-a-service, is the selling of a service or outcome derived from a product, you might wonder if the IRS considers PaaS / SaaS to be goods, or service rendered? The answer to this question is actually a bit complicated.
Matters are complicated further by different state laws, which may individually consider SaaS to either be a service, or a tangible product (software) that is taxable – and whether the company or an independent contractor is consulting you on the product-as-a-service.
In this sort of scenario, it becomes very important to talk to an accountant familiar with the laws of your state to determine how to proceed.
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