Form 1099-K vs. Form 1099-NEC: What’s the Difference?
Key takeaways
The1099-K and 1099-NEC are two tax forms used for reporting payments to vendors and independent contractors.
The Form 1099-K, Payment Card and Third-Party Network Transactions, only applies to companies that process transactions through a payment card, payment apps or online marketplace. The Form 1099-NEC, Nonemployee Compensation, must be filed by all businesses for each person they paid at least $2,000 to for services performed during the year, such as an independent contractor or freelancer. Other types of payments, including fees, commissions, prizes, and awards also need to be reported on Form 1099-NEC.
There are important reconciliation facts for businesses to take into consideration when preparing Forms 1099-K and 1099-NEC. Payments must be reported accurately on the appropriate form type.
The IRS requires businesses to provide each recipient with Form 1099 on or before Jan. 31 each year. Taxable income must be reported on personal tax returns. This includes payments for goods and services sold or services provided.
Here's what you need to know about the differences between Forms 1099-K and 1099-NEC.
What is a Form 1099-K?
Form 1099-K, Payment Card and Third-Party Network Transactions, is used for payment card transactions through third-party networks. It generally applies to debit, credit and prepaid card payments processed for selling goods or providing services.
Settlement organizations use this form to report when they send a vendor or freelancer card or network transactions during the year.
A vendor or freelancer only receives this tax form if they have more than a minimum number of transactions and total payments.
A vendor or freelancer receives a 1099-K form if they have over 200 transactions through the card or network and over $20,000 in payments, according to the IRS.
Confirm the IRS reporting thresholds each tax year. Who sends a Form 1099-K?
Only certain types of businesses send a 1099-K.
Payment apps and online marketplaces prepare these tax forms for users and the IRS.
Credit, debit and gift card companies may also send out a 1099-K.
This is how the IRS tracks payments people receive for an online business. Other types of businesses generally don't need to prepare this tax reporting form.
"Unless you're running a third-party settlement network, chances are good that you will not be sending out Forms 1099-K," says Ellen Feeney, Vice President, Assistant General Counsel, ADP. "However, you could receive one if your business meets the transaction threshold."
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Form 1099-K vs. Form 1099-NEC
While the Forms 1099-K and 1099-NEC both serve the role of reporting payments to the IRS, they serve two different categories.
1099-NEC
Many businesses may need to complete and send out Forms 1099-NEC.
Form 1099-NEC reports payments made to nonemployees or self-employed workers like freelancers or independent contractors
When your business contracts this type of worker and pays them $2,000 or more in a tax year, you must send them a 1099-NEC.
The number of transactions does not matter.
1099-K
1099-K only applies to third-party settlement networks processing transactions.
Other businesses might receive a 1099-K if they receive payment through one of these networks, but they will not need to prepare a 1099-K.
If a transaction can be reported on a Form 1099-K, it must be reported on the Form 1099-K. If a transaction can be reported on a Form 1099-K as well as another Form 1099 (NEC, Misc. Etc.), the transaction should only be reported on the Form 1099-K.
The IRS requires a Form 1099-K to be issued if someone receives over $20,000 in total payments and over 200 transactions in the tax year.
Over time, the IRS plans to reduce the reporting threshold for the Form 1099-K.
Always confirm the applicable thresholds for the current tax year.
Form 1099-K | Form 099-NEC | |
Usage | Only by third-party settlement networks and cards | Any business that hires contractors or freelancers |
Income reporting limit | $20,000 of payments | More than $2,000 in payments to a contractor or freelancer |
Minimum transaction limit for reporting | Yes. Total transactions over200 plus $20,000 in payments in the tax year. | No |
How should businesses prepare?
Keeping accurate and comprehensive records is the best way to prepare and stay compliant with these IRS reporting forms.
"Businesses should make sure they are closely tracking all independent contractors so that anyone who meets or exceeds the 1099-NEC payment threshold receives a Form 1099," Feeney says.
Consider reminding freelancers and contractors to compare payments they receive each tax year with all Forms 1099 they receive. It's also a good idea to start processing these forms as soon as possible. Every year, give yourself some breathing room to confirm whether you'll need to prepare and file Forms 1099-K and/or 1099-NEC.
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FAQ
What is a Form 1099-K?
Form 1099-K is used for payment card transactions through third-party networks.
It generally applies to debit, credit and prepaid card payments processed through parties like VISA, Mastercard, PayPal or Square.
It also includes networks like Uber and Airbnb, which process payments between customers and vendors or freelancers.
Who sends a Form 1099-K?
Only certain types of businesses send a 1099-K.
Payment apps and online marketplaces prepare these tax forms for users and the IRS.
Credit, debit and gift card companies may also send out a 1099-K.
How does a Form 1099-K differ from a Form 1099-NEC?
The 1099-K only applies to third-party settlement networks processing transactions.
The 1099-NEC threshold is much lower and applies when a vendor or contractor receives more than $2,000 in a year.
The number of transactions does not matter for 1099-NEC.
How should businesses prepare?
Keep accurate records.
Remind freelancers and contractors to track their income and compare it with the forms they receive.
Process early.
