Every time tax season rolls around, it sends many entrepreneurs into confusion. What forms do you need to send? Who should you expect to receive forms from? What do all of these different forms mean? And what in the world is the difference between a 1099-K vs 1099-NEC?!
The forms that are most common for small business owners, and also can be the most confusing, are the 1099 forms. These forms are used to report non-employment income to the IRS. If a business pays out more than $600 in non-employment income to a taxpayer during the year, they are required to issue a 1099 to the taxpayer in question.
Simple enough, right?
Well, within the 1099 category, there are many types of forms, which is where things can get confusing. Since becoming an entrepreneur, you might have noticed that you’ve been receiving other types of 1099s all along. Maybe you’ve gotten a 1099-INT from your bank due to the interest you earned, or a 1099-SA if you took distributions from your health savings account.
With over 15 different types of 1099s out there, you’ve likely run into at least a few of them. But today, we’re going to focus on the two that are most common for small business owners to receive: the 1099-K and the 1099-NEC.
The 1099-K will come from a third-party payment system like Venmo, PayPal, HoneyBook, etc. and simply is a transaction record showing that said payment network transferred at least $600 to you during the year.
In previous years, you needed to receive over $20,000 in business income or payments, and hit more than 200 transactions, in order to receive a 1099-K. However, starting in 2023 the reporting threshold has been lowered to $600. So if you hadn’t previously been getting a 1099-K from a third-party payment system, you might be starting to get them in the coming year.
The payment system will send copies to the IRS and to the person receiving the payments. An informational return - you don’t have to do anything with it. Can be used to calculate how much business income you received. Be sure not to double-report. A client will likely send you a 1099-NEC, and if they paid through a third party system, you’ll also have that income accounted for on your 1099-K. This is why it’s critical to have a good accounting system and records in place.
On the other hand, you’ve got the 1099-NEC. This is a new form that was introduced in 2020, and is meant to report money paid to people that worked for a company but weren’t considered employees - freelancers, self-employed, side gigs, etc. Previously, 1099-MISC were used in this situation, but the IRS created a form specifically for this situation as it’s so common now.
If a business paid someone at least $600 during the year, and that person is not an employee and this also was not a personal payment, that business would need to file a 1099-NEC. Businesses are required to file their Form 1099-NECs by January 31st. This means sending to both the IRS and the recipient by that date.
The 1099-NEC is one that, as an entrepreneur, you may both receive and need to file. For example, if someone hired you as a freelancer this year, they would be required to file a 1099-NEC with the IRS and send you a copy. Similar to the 1099-K, the NEC is also an informational return. Meaning that once you get your copies from businesses that hired you, they are to be used informationally, but make sure not to accidentally over-inflate your income!
On the other hand, If you hired a freelancer,you will need to file a 1099-NEC with the IRS, and send that freelancer a copy for their own tax records. Before you start panicking ….
Payer’s and Recipients Information - name, address, TIN
Income tax withheld
(can be filed electronically or by paper form)
Have the person you’re paying fill out a W-9.
Fill out the 1099-NEC.
Copy A goes to the IRS
Copy 1 is sent to your state tax department
Copy B is sent to the recipient
Copy 2 is also sent to the recipient
Copy C is kept for your own business records
Sounds similar, right? When it comes to the 1099-K vs 1099-NEC, the difference between the two is really who is sending them. The 1099-K is going to come from a third-party payment system. A 1099-NEC is going to come from another business that hired you. This is also the form you’ll need to send off to any freelancers you hired during the year.If this is still feeling overwhelming, it may be because you don’t have some of those foundational pieces in place for your business. The good news? We’ve got a free checklist that will help you set up everything you need to get your legal foundation shored up, and make all of this feel like a piece of cake! Grab the No-Nonsense Checklist to Starting a Business!
Amanda Warfield is a simplicity-focused content marketing and launch strategist, author of the book Chasing Simple Marketing, and host of Chasing Simple - a podcast to help creative entrepreneurs uncomplicate their marketing and business. She traded in her classroom lesson plans for speaking and educating creative entrepreneurs on sustainably fitting content marketing into their business, without it taking over their business - so that they have time to grow their business.
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