1099-NEC vs. 1099-MISC

[Brownielocks]

Today I rec'd two forms from Zazzle for taxes.   I understand the 1099-MISC which is for royalties earned.
But, I also got a 1099-NEC for "Non-employee Compensation."   I've never received that before in all the
years I've been on Zazzle.

What is this for?  How do I handle this amount for my taxes?

Thanks,

Sheila

[Cat]

1099-NEC is for referrals. No clue why it's separated out from royalties.

[alissag]

Non-employee compensation gets taxed differently than royalties. Royalties are considered passive income while the nec stuff is considered active income. So, that's why Zazzle separates them out into 2 different forms.

[Barbara]

One year I received the NEC form and it had to be combined with the MISC form on my taxes. It seemed the IRS didn't actually want it separated out. Either that, or they didn't care which line I reported what on, just that I reported the income. Most of us designers are small potatoes to them. When my husband and I ran our own business, active and passive income were a puzzle because the explanations in the directions were more opaque than midnight in a deep cave. We gave up and did the best we could without any repercussions. If any of you are really old like I am, you might remember being able to do taxes on a postcard.

Colorwash's Home

[Cat]

As far as I can tell, reporting royalties on your taxes is a complicated gray area. I've always reported them on Schedule C - which means they are subject to self-employment tax - because I'm actively engaged in creating and marketing the works that generate the royalties. My interpretation is that schedule E is for reporting royalties on something like an oil-well that you own. But info on the web seems to be conflicting on this point, so I'm really confused.

Here are a few snippets I gathered from the interwebs:

You would use Schedule C, not Schedule E, to report royalties if you’re a self-employed writer, songwriter or artist. The key phrase here is “self-employed.” You created something with the intention that it would earn you a livelihood. It's an ongoing endeavor, not a one-shot effort. Schedule E is appropriate for reporting passive income. 
What Are Royalties on Schedule E? | Pocketsense

Royalty income from active work in a trade or business should be reported on Schedule C as self-employment income. For creators of intellectual property, you will need to review your active participation in the activity each year because you may keep earning royalties throughout your lifetime. If you stop creating intellectual property, your royalty income will change from self-employment income on Schedule C to passive income on Schedule E.
Should my royalty income be reported on Schedule C or Schedule E? - FreeTaxUSA Community

Form 1099-MISC differs from Form 1099-NEC in one distinct way. A business will only use a Form 1099-NEC if it is reporting nonemployee compensation. If a business needs to report other income, such as rents, royalties, prizes, or awards paid to third parties, it will use Form 1099-MISC. Generally, a person will now receive 1099-MISC to report payments that are not subject to self-employment taxes.
Here Is The Difference Between The Form 1099-NEC And Form 1099-MISC – Forbes Advisor

Clear as mud! So I dunno, I'd LOVE to not have to pay self-employment taxes on my Zazzle royalties, but my gut still tells me that I should report them on Schedule C - or maybe I'm just being paranoid. I'm quite obviously not a tax expert so please don't take my confused ramblings as advice!

[northwestphotos]

You are not being paranoid! The tax reporting software that I use forces me to use Schedule C when entering my Zazzle earnings from my 1099-MISC form. Better to be safe than sorry!

[Barbara]

I've done a search on it, and everything says we should report the kind of royalties we make on Schedule C. Schedule E seems to be for people who earn royalties on things like mineral rights (whatever that is). And yes, that's what has happened to me each year with tax software--sending me to Schedule C.

Each year, I've tried to find a category on IRS forms that covers what we do. I end up using whatever seems vaguely close to it because there's nothing that actually covers it. Reformers have screamed for years about changing things to, for instance, a flat tax, but we all know this would be too simple. Complications in taxes are not the least in our favor.

Colorwash's Home

[Barbara]

@Cat  That's precisely what I found, and though it's annoying to use Schedule C, we have to do it because someone has to pay the Social Security. If we're an employee, the business employing us pays half the S.S. and we pay the other half. Given that we're self-employed, we are both employer and employee, and thus we pay both halves. It's kind of annoying when, like me, you're retired and on Social Security and still paying into the fund.

One year a lot of us received both types of 1099. If I remember correctly, Zazzle reissued the 1099-MISC without splitting it up between the MISC and NEC versions.

Maybe they've changed accounting firms and it's why we've seen a delay and why some people, maybe mistakenly, are receiving the additional NEC form.

Colorwash's Home

[tiffjamaica]

Just wanted to add, FreeTaxUSA is a great site for doing US taxes. Sites like Turbo Tax get very pricey to file when you have these types of forms (MISC and NEC).  I find FreeTaxUSA to be extremely easy to follow and pretty straightforward where to enter all of your information. 

And if this is helpful to anyone: (copied from irs.gov) Self-employment status. Self-employed individuals must file an annual return and pay estimated tax quarterly if they had net earnings from self-employment of $400 or more.

[Barbara]

Thank you for the recommendation! I was dreading using TurboTax again, and I refuse to use HRBlock because, whenever I've used them, they've made errors that weren't in my favor.

That's an odd thing with the self-employment tax, given that the threshold is quite a bit higher for even declaring earnings. Also, I suspect they're talking about actual registered businesses such as my mother had when she owned a shoe store. Those estimated taxes were a nightmare.

Colorwash's Home

[tiffjamaica]

I wish they'd just bill us what we owe so we didn't have to interpret tax laws each year or pay someone to do it for us!

[tiffjamaica]

I've edited my previous comment a bunch of times now, not sure of how much I want to say about taxes because I am not a tax professional!  I will say though that I don't think the self employed label only pertains to registered businesses.  It's easy for us to think of ourselves as not a "real" business, but in the government's eyes I'm pretty sure we are.

This is from irs.gov: https://www.irs.gov/individuals/check-if-you-need-to-file-a-tax-return

Generally, you need to file if:

• Your income is over the filing requirement
• You have over $400 in net earnings from self-employment (side jobs or other independent work)
• You had other situations that require you to file

So the filing requirement thresholds on earnings is different from the self employment income requirement.
My understanding is that we are considered self employed here as independent contractors, freelancers, or sole proprietors and 1099 NEC, MISC, and K are for self employment and throw you into Schedule C  when you file online. You'll have to research for yourself if you need to file the SE 1040 or if you need to pay quarterlies (you can avoid it if your spouse has W2 withholdings that can cover yours for example). 

I only started to look into all this a few years ago when my income here went high enough that I had to worry about it. I spent many years filing with no idea what I was doing and not worrying about it because my payouts were so low I thought they wouldn't care about little ol' me anyway!  Now, I wouldn't mess with it and I consult with a local tax pro to file correctly because with the rise of the gig economy, the tax laws have/are becoming more strict. ANYWAYS, like I said, don't take my word for it - search or ask someone you trust. Irs.gov has all the info but it's hard to decipher sometimes. Turbo Tax also has helpful articles about 1099 MISC and 1099NEC and what is considered "self employed" (but don't file with Turbo Tax - FreeTaxUSA is cheaper! haha). 

Wishing you all easy filing this year!