Skip to main content

1099-NEC vs 1099-MISC- When should they be used?

By

In 2020 the IRS changed the types and format of Form 1099. Before 2020, non-employee compensation was reported on box 7 of Form 1099 Misc. When the change took effect, box 7 was changed to a single question and non-employee compensation received its own 1099. In this post, we will explain the different situations in which each 1099 may be used. It will not be a complete list, but it will give some context to the usage of the different forms.  

1099-NEC

Form 1099-NEC is used when reporting payments made to a freelance or contract worker who is not an employee of the company. Form 1099 does not need to be filed for every contractor, only the ones that were paid $600 or more during the year. Form 1099 also is not needed if the contractor is arranged as a corporation. Since the person is not an employee, the organization does not withhold any taxes from their pay. The form should be filed with the IRS and sent to the individual by January 31st. 

To fill out the form the organization should have a copy of the contractor's W-9, it is a good practice to acquire a W-9 as soon as the contractor is hired. From there all that needs to be entered on the 1099 is the contractor's name, address, social security number (or EIN), and the amount paid to the individual. If for some reason tax was withheld, which would not be normal, then it would also be reported on the 1099.

1099-MISC

Form 1099-MISC is used for a larger variety of situations than 1099-NEC. Form 1099-MISC must be filed and sent to any entity that was paid $600 or more by January 31st of the following year. Some of the common situations that would require a 1099-MISC are rent, royalties, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, payments to an attorney, and other unusual circumstances. 

To fill out the form the organization will need to acquire a Form W-9 from the entity or have them provide their EIN/SSN, address, and full name. This information must be reported on the respective boxes on the 1099, reporting the income in the appropriate box. After that, file the form and send a copy to the individual or business. It is an easy process as long as the necessary information has been collected. The best practice is to collect the information throughout the year so that at year-end all that needs to be done is determine which individuals/entities received more than $600. 




Comments

Post a Comment

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

By
Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a...
Post a Comment
Read more

How can my ministry expenses be covered by the church?

By
     How can my ministry expenses be covered?                            Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...
Post a Comment
Read more

What is the best retirement account for a Minister?

By
       What are my options for retirement savings?                  Regardless of options, start now! You probably have learned about traditional and Roth IRAs. We have often found them well short of the benefits we will share here regarding Internal Revenue Code section 403(b) plans. These plans must be established by your employer (although you might need to be the initiator). They are funded in two ways—withholding from your paycheck at your option (called “elective deferrals”) and as initiated by the employer (matching or non-elective contributions). These contributions not only save income tax, but they also reduce the income you must report as subject to the 15.3% SECA tax. Further, at retirement with the cooperation of your church or Christian ministry the distributions to you can be tax-free to the extent of your qualified housing expenses. Many ministries also adopt what are often called “FICA alternative” be...
Post a Comment
Read more