Received Forms 1099-MISC and 1099-NEC - for Calendar Year 2022

[SocolikCardShop]

In previous years, I received a form 1099-MISC from zazzle (even though i was paid through paypal).  I never received a form 1099-NEC.  Could someone from zazzle please explain what these forms are, especially the 1099-NEC which I never heard of before?  

thanks,

marcia s. 

[Cat]

The 1099-MISC is for your royalties. The 1099-NEC (non-employee compensation) is for money earned through referrals. I have no clue why they separate it out that way, but that's how they've always done it - at least they've done it that way as long as I've been here.

[SocolikCardShop]

thanks, cat.  i've never received a 1099-NEC before, even though i have gotten referrals.  are they both reported/taxed the same way?

- marcia s.

[Cat]

Apparently the 1099-NEC started being used in 2020 - which would make sense as to why I've always gotten both from Zazzle, since I really didn't start doing much here until 2019. I know less than dirt about IRS stuff, but according to this article it's intended to be used when paying independent contractors. The 1099-MISC is now used for stuff like prize money but it also is supposed to be used for royalty payments - which would explain why they separate it out. I'm gonna go read the links that Windy & idraw posted and perhaps they'll explain the distinction better.

In terms of how you report the income, I've always lumped them together as income on my Schedule C. But as I said - I'm not exactly an expert about IRS stuff so if you have a tax person you should ask them what they advise.

[Windy]

Don't do that. Royalties belong on Schedule E https://www.irs.gov/pub/irs-pdf/f1040se.pdf titled Income or Loss from Rental Real Estate and Royalties. 
If you are not using an accountant, it might be a good idea to use one this year, just the once.....you will learn how it should be done and then in future years, putting aside major tax changes, you can just keep doing it the right way--the way your accountant demonstrates to you this year.

The way I understand it, is that self employment income comes along with the requirement that you pay medicare and social security tax (employment taxes) on that income.  You do not have to pay those employment taxes on your Schedule E income. So make sure to list royalty income where it belongs.

[Cat]

Well, it would be lovely if I could get away with reporting Zazzle royalties on Schedule E and not have to pay self employment taxes on them, but I think that Schedule E is only for royalties derived from "passive activities" like if you own an interest in an oil well, or if you own mineral rights or if you bought a patent or copyright or something. 

According to the Schedule E instructions (for line 4) "If you are in business as a self-employed writer, inventor, artist, etc., report your royalty income and expenses on Schedule C, not on Schedule E." 

I do have a few good friends who are tax accountants though, so I'll check to be sure because nothing would make me happier than not having to pay self-employment tax on that money!

[Windy]

If that's the instruction, then it sounds like you are right! At some point, though, you are no longer actively employed and yet you may still be getting royalties, if things go well. I know a number of professors who have written college books which sell very well. And then at the regular retirement age, those people have retired and their books keep selling. So I wonder if they have to keep paying SE taxes? 

But on the other hand, I don't understand why it's necessary for Zazzle and others to use two different 1099 forms, one for royalties and one for referrals, if both amounts are to be reported on the same form. I did read the instructions for both forms and at some point I really just lost the thread.....

[Cat]

Good questions! The best I can figure it, the government was trying to get away from so many different things being lumped together as MISC - things as diverse as lottery winnings and payments to independent contractors. The royalties thing is strange though because in our case anyhow, it seems much more like it belongs under nonemployee compensation. I'm thinking there must be lots or people (or at least lots of money being made) with the other sort of royalties - like from oil wells and the like, which is why it ended up under MISC rather than NEC. Maybe they need different words rather than calling both things "royalties!"

[Windy]

I am reading more about this now, and it seems to me that a lot of Zazzlers would be correct to use Schedule E because their "real job" is sales clerk, or accounts manager or dental hygienist or whatever, and the income from Zazzle is not representative of their main job and is therefore "supplemental." So that's a weird wrinkle....and it probably does explain why it's necessary to send two separate 1099 forms.

[HoneyBlossomA]

I was actually just wondering about the referral tax form, do they always send that form separately from the royalties? As in two separate letters? I've only received my royalty totals but not the referrals and it just seems very late in the year already (for taxes at least) for that to not have arrived.

[Cat]

My referral 1099-NEC came as a separate form mailed about a week or two later than the royalties (1099-MISC.) Does seem late though...

[HoneyBlossomA]

Thank you, that's good to know!

[VivianD117]

trying to understand.  thanks.

[Windy]

This is explained in this Forbes article. https://www.forbes.com/advisor/taxes/received-form-1099-nec-instead-of-form-1099-misc/

[idraw]

@SocolikCardShop 
Government link here explains both forms—-
https://www.irs.gov/forms-pubs/about-form-1099-nec

[SocolikCardShop · Accepted solution]

@idraw, @Windy - thanks so much! i will read the articles and hopefully will be up to date!

- marcia s.