IRS Form 1099-NEC and 1099-MISC: Rules and Exceptions

business deductions filing taxes Jan 19, 2020

IRS requires business owners to issue Form 1099-MISC or 1099-NEC to people or business entities they pay during the year. This is the governments way to ensure that if you are taking a business deduction, someone else reports the corresponding business income. Not all payments require filing Form 1099-MISC and there are exceptions to the rule.

There are two types of income that are reported: non-employee compensation and miscellaneous income, discussed in further detail below. These payments are not reported on a W-2 so the IRS provides the Form 1099-NEC or 1099-MISC for reporting them.

Note: This blog covers the most common rules and exceptions related to the Form 1099-NEC and 1099-MISC rules. Consult IRS instructions and your tax professional for complete rules. 

Issuing a Form 1099

Follow these steps each January for payments made in the prior year:

  1. Identify anyone your business paid more than $600 during the year.
  2. Determine which payments are for independent contractor services.
  3. Evaluate if any of the exceptions apply, indicating you will not need to file a Form 1099 for the particular business payments. Exceptions often exist for certain electronic payments and for Corp entities.
  4. File any required 1099 forms with the IRS by the deadline (see below)
  5. Send copies of the filed 1099 forms to the recipient (person or business you paid) by the deadline. 

Non-employee compensation - Form 1099-NEC

Non-employee compensation represents payments to independent contractors, either sole proprietors or LLC businesses, who perform services for your business. These payments were previously reported on form 1099-MISC but beginning in 2020, they will be reported on form 1099-NEC. The 1099-NEC form was used before, but was discontinued in the early 1980's. It has now been reinstituted for 2020. See below for payments that need to be reported on Form 1099-MISC.

The IRS is looking for information about payments made to self-employed business owners for services, including non-employee workers, attorneys, accountants and others who provided services to your business. If the entity you paid for services is an S-Corp or C-Corp, you do not need to issue a 1099-NEC unless the payment was for legal services. Legal services are reported regardless of the type of entity the law firm is. Also, certain electronic payments are exempted. See more about exceptions below. 

Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish also are reported as non-employee compensation on Form 1099-NEC.

Miscellaneous income - Form 1099-MISC

The Form 1099-MISC is for payments, other than non-employee compensation, made in the course of operating a trade or business, including non-profits and certain trusts and other organizations. These payments are income to the person you are paying and need to be reported on their IRS tax returns. Payments unrelated to a trade or business are not reported on the 1099-MISC.

You are expected to obtain a Form W-9 and issue a Form 1099-MISC form if you meet the following payment criteria unless you fall under one of the exceptions described below. Some of the payments that will qualify you to issue a Form 1099-MISC are:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
  • At least $600 business expenses for:
    • Rents (box 1) 
    • Prizes and awards (box 2) 
    • Other income payments (box 3)
    • Payments to an employee or their estate after their death (box 3)
    • Generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 3)
    • Backup withholding (box 4)
    • Any fishing boat proceeds (box 5)
    • Medical and health care payments (box 6)
    • Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (box 7)
    • Substitute payments in lieu of dividends or interest (box 8)
    • Crop insurance proceeds (box 9)
    • Gross proceeds to an attorney, such as settlement payments (not attorney services) (box 10)
    • Section 409A deferrals (box 12) 
    • Nonqualified deferred compensation (box 14)
    • State taxes withheld (box 15)

If your payment amount and type suggests a Form 1099-MISC is required, you may avoid issuing it if you meet one of the exceptions below.

Exceptions

The IRS provides many exceptions to the Form 1099-MISC reporting requirements. You may obtain a W-9 before determining the payment is exempt. For example, upon obtaining the W-9 you may discover the entity is taxed as an S-Corp, exempting you from issuing the 1099-MISC. In that case, retain the W-9 as evidence that you do not need to file the 1099-MISC. Specific exemptions are detailed below.

Corporations

You do not need to provide a 1099-MISC to most Corporations, including entities that elect to be taxed as an S-Corp. However, this exception does not apply if the payment is for legal services or medical/healthcare. See IRS Instructions for more information about reporting payments to attorneys and medical and healthcare payments. For all other entities, if you receive a Form W-9 that states the entity is a Corporation or is taxed as a Corporation, you do not need to file the 1099-MISC. 

Rent paid to real estate agents or property managers

If you rent space and your rent is paid to a real estate agent or property manager instead of to the landlord directly, the real estate agent or property manager is required to provide the property owner with the Form 1099-MISC. You may inquire if they are doing so and document the exception applies in your case.

Payments made via credit and debit card processors
If you make your payment using a credit card, debit card or other credit card processing method such as your bank card, PayPal, Square and Stripe, the payment falls under Form 1099-K rules instead. You do not need to issue the 1099-MISC. The credit card processor will issue a 1099-K if those rules apply.

Note: Cash transfers via providers such as Zelle, Venmo, CashApp, or checks issued via electronic banking, do not qualify for this exception and still require you to issue a 1099-MISC. Venmo terms of service preclude using it for business without permission.

Other exceptions

The following less common payments are also exempt from issuing a Form 1099-MISC. See the IRS Instructions for more details. 

  • Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
  • Employee payments of wages, military differential while on active duty, business travel allowances, (reported on Form W-2).
  • Cost of current life insurance protection.
  • Payments to certain tax-exempt organizations and governments.
  • Payments made to or for homeowners from certain state programs.
  • Certain forms of compensation by the Department of Justice/state programs.
  • See full IRS instructions for other exceptions for payments such as criminal informants, scholarships, foster care and cancelled debts. 

Deadlines for 2020 

The deadlines for filing 1099 forms vary based on the type of 1099 form.

1099-NEC

You are expected to file and furnish the person or entity you paid with a statement or a copy of the Form 1099-MISC by January 31st of the year following the year the payments are made. This provides the recipient time to review the form before filing their own tax returns. Since that day falls on a Sunday in 2021, 1099-NEC forms for 2020 payments are due on February 1, 2021

1099-MISC

If your 2020 payments do not include non-employee compensation, the 1099-MISC deadline is March 1, 2021 for paper filings and March 31, 2021 for electronic filings. It is preferable to file 2020 forms electronically as the IRS is backed up on processing mail due to the pandemic. 

For more information see IRS 2020 General Instructions for Certain Informational Returns, Section C, "When To File." 

How to file

The easiest and best way to file your Form 1099-MISC is to utilize your tax preparer. If filing on your own you can use a filing service. Although Simple Profit does not endorse any particular service, common services are, in addition to Intuit/Turbot Tax are:

Tax1099.com

Track1099.com
efile4biz.com
efilemyforms.com

Form W-9

If you suspect you may need to issue a 1099 form, request the person you are paying complete a Form W-9. Ideally you collect the W-9 before you start doing business so you do not have to run around and track it down at the end of the year. The Form W-9 can be found and printed from the IRS website

If you have a Form W-9 from a prior year and do not believe the information has changed, you do not need to get an updated W-9. You can issue the Form 1099-NEC or 1099-MISC using the information you already have on file.

What if my landlord refuses to fill out Form W-9?

Ideally you will have collected the W-9 when you initially do business with someone. Sometimes people do not know the IRS rules and refuse to give you the information you need to file the 1099-MISC. If you have already paid them, there are a few things you can do.

You may be able to determine their entity is a Corporation by checking your state business registration site. If not, print out the IRS rules found on their informational page About Form 1099-MISC and explain you are required to provide them a statement and file with the IRS. Ask them to speak to their accountant about this IRS rule. Finally, inform them you will need to file with the IRS whether you have complete information or not, but you would prefer to have their accurate filing information rather than the IRS track them down to get it. If you cannot obtain the W-9, do your best to fill out the 1099-MISC with as much information as you have.

Bottom line

Business owners need to review payments made the prior year in early January to ensure compliance with this important IRS requirement. The rules for filing the Form 1099-NEC and 1099-MISC can be confusing and easily misunderstood. Once you know the rules, what forms need to be issued and have gathered the Form W-9, the process is relatively simple and straight forward. 

 

 

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