The IRS tax Form 1099 is also referred to as Information Returns from the IRS, and it should be sent by the organization to the independent contractor if they are paid more than $600 as compensation. The common types of 1099 Forms are 1099 MISC and 1099 NEC.
What are Tax Form 1099-NEC and 1099-MISC?
Both the tax Forms 1099-NEC and 1099-MISC come under the IRS Forms meant for reporting information returns. 1099 Taxpayers use forms to report certain expenses to the recipient and the Internal Revenue Service annually. Taxpayers use 1099-MISC to report payments not subject to self-employment tax and include payments like rent and prizes. 1099-NEC is used for reporting non-employee compensation.
Form 1099- NEC
The IRS Tax Form 1099-NEC is used for reporting non-employee compensation which corresponds to the payments for employees who are not on the company’s payroll. They are associated with the company on a contract basis to complete an assignment or project. This workforce will include gig workers, independent contractors, and self-employed individuals. They will have to report the payments they received in box 7 of the MISC tax Form.
Who requires Form 1099- NEC?
If a business has paid its contractor $600 or more in a year as their worker’s compensation, then the business should fine Form 109-NEC. The business should not file it for its employees, as employees will get W-2 Forms to report their wages and compensation.
Similarly, freelancers, independent contractors, and other service providers who have received compensation of more than $600 in a tax year without being employed with the contractor full-time should report their income with the IRS through this Form.
Freelance workers such as editors, writers, and other self-employed individuals operating as LLCs or sole proprietors will receive Form 1099-NEC. Small businesses that indulge in work such as web design, network administration, and accounts will report their income through this Form. Also, contractors who do not receive Form W2 will get Form 1099-NEC.
If the independent contractor is not registered as an S-Corporation or a C-Corporation, they will not require Form 1099-NEC. Also, if the payments are made through credit cards or business paying services, then 1099 Forms are not required, as the credit card company makes the payment of the payer.
Form 1099- MISC:
Individuals and businesses use the 1099-MISC tax Form to report certain qualifying expenses during the tax year. This Form is a receipt of payment made to the payee, and they can, in turn, use them to file their returns.
Miscellaneous income, not subject to self-employment tax, is generally reported in this Form. Thus, it includes awards, prizes, rent, legal settlements, etc. Employers using this tax Form should prepare and file them for any payee to whom they have paid $600 or more during the calendar year. They should also send a copy to the individual or business to help them declare their income while filing their returns.
Who uses Form 1099-MISC?
1099-MISC is quite common among businesses and individuals who regularly indulge in the real estate business and buy supplies from clients. Some common payments that are reported on this Form are,
- Rents – Real estate companies and tenants issue this Form to landlords and report the rent paid.
- Prizes – Those who receive a huge cash payment, or have received prizes such as casino winnings, will get this Form to report the same to the IRS.
- Legal Settlements – Payments received from legal settlements should be reported.
- Reimbursements – Contractors who are regularly reimbursed for items that they purchase from clients are subject to self-employment taxes and should report the same on 1099-MISC.
Deadline for filing Tax Form 1099-NEC and 1099-MISC
According to Section 6071, (C) OF the IRS- the deadline to file 1099-MISC and 1099-NEC forms
Taxpayers and businesses are expected to report Form 1099-NEC on or before January 31, using either paper or electronic filing procedures.
File Form 1099-MISC by February 28th if they file on paper, or March 31, if you file electronically. Need to send copies to recipients by February 1st of the tax year to help them file their returns with the IRS without penalties.
Late Fee/Penalties for 2022-2023 Tax Year
The penalties range from $50 to $ 580 if the taxpayer fails to file a 1099 tax Form. The penalties depend on how late the tax Forms were submitted. The penalty per tax Form will depend on the length of the delay, and it is as follows.
- The penalty of $50 per Form, up to 30 days for which the tax Form was not filed.
- The penalty of $110 if the Form was filed late for more than 30 days, but it was filed before August 1st, 2023.
- The penalty of $290 if the tax Form was filed on or after August 1st, 2023.
- The penalty of $580 if the taxpayer neglects to file the tax Form intentionally.
The IRS will consider you to be a small business if you have earned an annual revenue of $5 million or less for the past three tax years. The maximum penalty could be over $1,177,000 for small businesses.
Late filing penalties for independent contractors
Independent contractors who fail to file the tax Form with the IRS will also attract heavy penalties if they miss the deadline. These penalties can also attract interest; from the day they will be charged. Thus, the longer the person waits to pay these taxes, the larger would be their tax bill. Penalties are generally focused on the clients, who have an obligation to send and prepare the tax Forms to both the small business contractors and the IRS.
Independent contractors are not unlikely to get fined for not submitting their tax Forms on time if they have a record of all their earning information correctly. The penalty details of independent contractors are as follows.
- Employers who do not submit their Form 1099 on time will be eligible to pay a fine between $50 and $270.
- Failing to file the Form within 30 days after the deadline will invite a fine of $50, and beyond 30 days, it becomes $110 per tax Form.
Thus, the tax amount could pile up if the taxpayers do not pay them on time to the IRS. If independent contractors are not able to file their returns on time, they should request an extension with the IRS, as it buys them additional time to pay the taxes without penalty.
IRS has fixed specific deadlines for taxpayers to file 1099 Forms to help them with fraud detection and to process the refunds appropriately. Not filing within the stipulated time will attract hefty fines from the IRS. IRS-approved service providers like Tax2efile have automated software and friendly service to help you file the tax Forms with the IRS within the deadline. The entire process takes only a few minutes and saves taxpayers from penalties.