1099 K vs 1099 NEC Filing and Reporting for 2023
For the second year in a row, the IRS has delayed implementing the new reporting requirement for form 1099-K. This is a great relief to many small business owners, and especially industries like content creators and influencers. Let's dig in.
What Are 1099s?
1099's are the IRS reporting method to collect information to ensure income tax compliance. There are currently 20 different 1099 forms. They are used to report everything from interest income paid to payments to contractors.
Overview of 1099-K and 1099-NEC Form Types
Two of the more common types of 1099's are 1099-K and 1099-NEC. Many small business owners will receive both types of forms. Entrepreneurs often have to issue forms 1099-NEC. Although you may receive a form 1099-K, you are not required to issue them.
1099-K's are used to report payments issued from payment cards and other third party network transactions. Think Paypal and Venmo.
1099-NEC's are used to report payments for non employee compensation to individuals.
1099-K
In November of 2023, the IRS delayed new reporting requirements for third party payment networks. The new regulations greatly expanded the number of people receiving 1009-Ks. Fortunately that won't be the case for the 2023 tax year.
Who Receives a 1099-K?
The new reporting requirements are that anyone receiving third party payments in excess of $600 would be issued a form 1099-K. For 2023, the implementation of that new requirement has been postponed. The old rules apply for 2023. Any payment settlement entity must report payment card transactions of $20,000 and 200 transactions. This includes payments from credit cards, debit cards, and payment apps.
For 2024, the IRS has proposed to lower that threshold down to $5,000 as they phase in to the $600 threshold. It is estimated that the new, lower threshold would result in an additional 40 million forms being issued.
What Information Is Reported on a 1099-K?
Information reported include:
Filer's name, address, and Taxpayer Identification Number (TIN)
Payee's name, address, and Taxpayer Identification Number
Gross amount of payments by month
Merchant category code
Number of cards not present transactions
Federal income tax withheld
State income tax withheld
How Does the IRS Use the Information on a 1099-K?
Supposedly, the IRS is going to use this information to further compliance by individuals on their income tax returns. Like other 1099 forms, they compare this information to the amount taxpayers report on their form 1040. There whole goal here is to catch business owners that are not currently reporting these payments as income. Part for the delay is at least in part that the IRS systems do not have the ability to compare this information.
1099-NEC
Form 1099-NEC is used to report payments are non-employee compensation. Previously these payments were reported on form 1099-Misc.
Who Receives a 1099-NEC Form?
Businesses are required to issue form 1099-NEC for:
Payments to individuals who aren't your regular employee
For services rendered in the course of trade or business
For a sole proprietors, partnership, estate, or corporation
At least $600 or more for a year
Generally speaking payments to corporations, LLC's, or partnerships do not require a form 1099-NEC. The notable exception is payments to attorneys. You can read more about the filing requirements in this article.
What Information Is Reported on a 1099-NEC Form?
Information reported on form 1099-NEC include:
Filer's name, address, and Taxpayer Identification Number (TIN)
Payee's name, address, and Taxpayer Identification Number
Gross amount of payments
Federal income tax withheld
State income tax withheld
How Does the IRS Use the Information on a 1099-NEC Form?
Similar to form 1099-K, the information on form 1099-NEC is used to ensure compliance. The IRS compares information on the 1099 forms to the amounts reported on individual tax returns. The hope is that this additional scrutiny will result in additional tax revenue.
Comparing and Contrasting the Two Forms: Differences Between the Two Forms
With so many different 1099's forms, there is a lot confusion around which ones to use, and what to do with forms you receive on your taxes. Third-party payment processors don't want the hassle of keeping all of the records the new 1099-K reporting requirements will cause.
Gig workers and independent contractors worry about the information reported will increase their taxable income. This is a legitimate concern wince many of these reported payments would be for personal items and not be reported come tax season.
While online marketplaces and increased options of payment methods are boon to all of us, the federal government doesn't like that all of this money doesn't show up on a tax form as business income. Of course a lot of these types of payments are for personal transactions and not subject to income taxes. For instance a personal payment to your niece for her birthday isn't taxable, but if she received a total of $600 from Paypal, she would receive a 1099-K.
The important thing is to accurately report all required information on all informational tax forms your receive. Whether it is form 1099-NEC or 1099-Misc forms, report business income. Of course, don't forget to take applicable business expenses to reduce your taxable income.
If you are not reporting payments because they are not required, make sure and keep detailed records of why not.
