Dear Dangerously in Love with Your Finances,
I am the owner of a web design agency located in Ohio. In addition to myself, I have five full-time employees and seven independent contractors. As the owner, I try to stay abreast of the changing rules and regulations that affect my industry and federal and state laws. Recently, I read an article that stated not only does our web design agency need to send out Form 1099-MISC, but we also have to send out Form 1099-NEC to qualifying individuals or businesses that we paid over $600 in cash. We have yet to encounter any issues since our bookkeeper takes care of this task. Nonetheless, I am curious about the differences in these forms and how it will affect my business?
–Overwhelmed with Form 1099 Misc and Form 1099 NEC
Dear Overwhelmed with Form 1099 Misc and Form 1099 NEC,
Reading your question warms my heart. I always get goosebumps when business owners what to know more about changing laws and regulations–and how these changes might affect their bottom line. In your case, these changes will only affect your bookkeeper’s processes. Form 1099-NEC is an additional form; in essence, this form may create an extra task for him/her.
The difference in a nutshell:
Before 2020, Form 1099-Misc a.k.a Miscellaneous Income was provided by you to certain individuals or businesses to whom you paid over $600 via check or cash. The form includes independent contractors, attorneys, rents, dividends, prizes, awards, and other income. It is pretty much a catch-all form, which leaves the responsibility of the bookkeeper to report the amounts paid in the appropriate box.
Form 1099-NEC removes independent contractor payments from Form 1099-MISC. “NEC” stands for Non-Employee Compensation–those individuals who are not on your payroll.
This form is mainly for freelancers and individuals who identify as sole proprietorships, partnerships, or limited liability companies which are not viewed as corporations in the eyes of the IRS.
Please know, your business may still need to send out and file both Form 1099-Misc and Form 1099-NEC. It all depends on your categories of payments.
If you have any additional questions, please do not hesitate to reach out.
As always, stay dangerously in love with your finances.
Lozelle Mathai, MBA