What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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The 1099 federal income tax information form is an important means of reportingnonemployment income to the Internal Revenue Service (IRS). There are currently 20varieties of 1099 forms corresponding with different types of income. Up until recently,employers used the 1099-MISC form to report payments to contingent workers — that is,freelancers and independent contractors.

However, that has changed with the reintroduction of Form 1099-NEC. In this post, we’llunpack in more detail how to report nonemployee compensation with a 1099 form andexplain the difference between the new Form 1099-NEC and Form 1099-MISC.

Table of ContentsWhat is Form 1099-NEC?Why is Form 1099-NEC Returning?

1. The rise of the gig economy2. Filing deadline simplification

Form 1099 NEC vs. 1099-MISC — what’s the difference?Who should file Form 1099-NEC?Who should file Form 1099-MISC?How to file Form 1099-NEC for independent contractors

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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What is Form 1099-NEC?

The NEC in Form 1099-NEC stands for nonemployee compensation. From a company’sperspective, nonemployee compensation constitutes any remuneration you pay to a workerwho you classify as an independent contractor rather than as an employee. Specifically,companies must provide contract workers with a 1099-NEC form if they paid them US$600 ormore for their services in a given tax year.

From a worker’s perspective, nonemployee compensation, also referred to as self-employment income, is any payment received for work provided as a freelancer orindependent contractor rather than as an employee. Employee income is reported on FormW-2. Some workers who are employees of a company and who do some freelancing on theside will receive both W-2 and 1099-NEC forms. Individuals must report all of their income, nomatter the source, when they file their taxes.

Why is Form 1099-NEC Returning?

Some contractors and employers may remember Form 1099-NEC. This form has been out ofuse since 1982. Since then, businesses have used box 7 on Form 1099-MISC to reportnonemployee compensation. So, why did the IRS reintroduce Form 1099-NEC this year? Thereare two main reasons for this change.

1. The rise of the gig economy

Freelance work has become increasingly common, with more and more professionals in theU.S. doing this type of work each year. Some workers engage in freelance work on the side inaddition to holding a more traditional position as an employee, while others are completelyself-employed. Nonemployee work can vary widely from casual, unskilled labor to consulting

Do businesses have to file both 1099-MISC and 1099-NEC?What are the filing deadlines for Form 1099-NEC and 1099-MISC?Globalization Partners helps you simplify international payroll

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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services from an expert.

Growth projections suggest that, by 2027, just over half of U.S. workers will befreelancing. The expanded prevalence of companies paying, and workers receiving,nonemployee compensation called for a form dedicated to this type of income rather thanjust a box on a miscellaneous form.

2. Filing deadline simplification

Another key reason for this change was to avoid the previous confusion caused by separatefiling deadlines for reporting employee and nonemployee compensation. Employers arerequired to file Form W-2 for employee compensation from the previous year by Jan. 31annually. However, the deadline for filing Form 1099-MISC was two months later. This largegap caused confusion and left some room for tax fraud.

In 2015, the IRS attempted to solve the problem with the Protecting Americans From TaxHikes (PATH) Act. This legislation aligned the deadline for reporting nonemployee income inbox 7 of Form 1099-MISC with the deadline for Form W-2, but left the later deadline for otherparts of Form 1099-MISC. Rather than solving the problem, this still perplexed many filersbecause they had two different deadlines for parts of the same form.

Reintroducing Form 1099-NEC is the most recent solution. Form 1099-NEC has a single filingdeadline, and that deadline aligns with Form W-2. So now, employee and nonemployeeincome share the same reporting deadline, and they each get their own tax form.

Form 1099 NEC vs. 1099-MISC — what’s the difference?

What is the difference between 1099-NEC and 1099-MISC? Both Form 1099-NEC and Form1099-MISC are used to report income to the IRS. However, they differ in the types of incomethey cover:

Nonemployee compensation: Form 1099-NEC is the new form used to reportnonemployee compensation. If a company pays workers for their services and the

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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workers are not W-2 employees, then the company would use Form 1099-NEC. Thisform is entirely dedicated to reporting payments to contingent workers.Miscellaneous income: Form 1099-MISC serves as a catch-all for miscellaneous forms ofincome that do not fit other tax forms. This used to include nonemployee compensation,which was listed in box 7 of the form. Now, companies will no longer use Form 1099-MISC to report nonemployee compensation. Form 1099-MISC, which is nowtitled Miscellaneous Information, will continue to be used for miscellaneous forms ofincome, but box 7 is now dedicated to reporting direct sales of at least US$5,000.

Form 1099-NEC and 1099-MISC share the fact that, at various times, they have each beenused to report nonemployee compensation. However, at the moment, the only thing theyhave in common is that they both belong to the 1099 category of tax forms, used to reportnonemployment income. Within this category, Form 1099-NEC and Form 1099-MISC are usedto report entirely different types of income.

Who should file Form 1099-NEC?

If your company paid a nonemployee US$600 or more within a given tax year for services toyour business, then you must file a 1099-NEC form. Note that this does not apply tointernational contractors based outside of the U.S.

According to the IRS, payments to nonresident aliens should be reported on Form 1042-S,Foreign Persons’ U.S. Source Income Subject to Withholding. As you would file Form 1096along with Form 1099, in this case, you would file Form 1042 along with Form 1042-S.

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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When it comes to U.S. workers, Form 1099-NEC applies whenever you’re paying anonemployee. Nonemployees can be anyone you hired on a contract basis to complete aproject for your company. This could include, for example, a freelance writer who worksregularly for your company or an expert who came in to consult on a specific project. It couldalso be an attorney whose services you engaged. If the worker is not on your regular payroll,then the individual is not your employee and should receive a Form 1099-NEC rather than aW-2 form.

In some cases, rather than hiring an individual contractor, you may have contracted acorporation, estate, or partnership to complete work for your company. In these cases, youcan still use a 1099-NEC form to report those payments. Note that nonemployeecompensation does not always take the form of direct payment for a service. Nonemployeeincome could also include fees, benefits, or commissions.

Any self-employed workers who contracted their services and received at least US$600 froma client should receive a 1099-NEC form. They must report this income when they file theirincome taxes.

Who should file Form 1099-MISC?

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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Form 1099-NEC only replaced box 7 on Form 1099-MISC, so there are still plenty of instanceswhen you might file this miscellaneous income form. However, if you’re wondering if you canuse 1099-MISC instead of 1099-NEC, the answer is no. You can only use 1099-MISC to reportother types of nonemployment income. Some examples of income that would necessitatefiling Form 1099-MISC include:

RoyaltiesRent paymentsPrizes or awardsFishing boat proceedsCrop insurance proceedsMedical or healthcare paymentsGross proceeds paid to attorneysSubstitute dividends and tax-exempt interest payments

As with Form 1099-NEC, US$600 is the cutoff that necessitates reporting income on this form,with the exception of royalty payments. Any royalties of US$10 or more should be reportedon Form 1099-MISC. The IRS provides detailed information on what types of income should beincluded in Form 1099-MISC. If there is not another tax form dedicated to the type ofpayments you need to report, then Form 1099-MISC should be the form you use.

How to file Form 1099-NEC for independent contractors

If you employed a contingent worker and need to file Form 1099-NEC, you will need toinclude the following information in the form:

Your company’s identifying information: Include your company’s legal name andaddress along with your taxpayer identification number (TIN).The recipient’s identifying information: Also include the recipient’s name, address, andTIN or Social Security number.Compensation amount: In box 1, list the total amount of nonemployee compensationyou paid to the recipient in the previous tax year.Withholdings information: If applicable, note any federal income tax or state income taxwithholdings.

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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The form also gives you a space for reporting state income earned and providing yourcompany’s state tax identification number. You don’t need to report this information to theIRS, but you can include it on the form as a courtesy to recipients since it makes it easier forthem to file their state income tax return.

The IRS encourages businesses to file Form 1099-NEC electronically using the FilingInformation Returns Electronically (FIRE) system. If you’re filing 250 or more informationreturns in the same year, then you are legally required to file electronically. Filingelectronically involves creating the file electronically from the start — you cannot scan a PDFcopy, for example.

Filing a 1099-NEC form should involve sharing the form with all relevant parties:

IRS: First and foremost, Copy A of Form 1099-NEC should go to the IRS. Along with Form1.1099-NEC, you will also submit Form 1096, Annual Summary and Transmittal of U.S.Information Returns, which reports the total dollar amount of all contractor payments.State department of revenue: Some state tax departments require that you send them2.a copy of the form, as well. Check your state’s requirements to see if this step isnecessary. If so, you will submit Copy 1.The contractor: Contractors should also receive a copy of the form — Copy B — so they3.can use it to file their income taxes. Copy 2 provides contractors with their state filinginformation.Your records: Finally, you should keep Copy C for your company’s records. You will need4.this information on wage expenses to file your business tax return.

The IRS will compare the information you provided with the contractor’s tax return, so it’scrucial that you report payments accurately.

Do businesses have to file both 1099-MISC and 1099-NEC?

Some businesses will have to file both Form 1099-MISC and Form 1099-NEC — in some cases,for the same worker, though this situation would be uncommon.

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The forms you must file depend on the type of payments your company needs to report tothe IRS. For example, if your company employs contractors and hosted a contest or adrawing with monetary prizes, you would likely need to file both forms to report thesedifferent types of payments. If you do need to file both types of 1099 forms, you must file aseparate Form 1096 for each form type.

In many cases, companies that used to file Form 1099-MISC to report payments tocontractors will now simply switch over to Form 1099-NEC. There is no longer any need touse Form 1099-MISC to report nonemployee compensation — this form is only relevant toyour company if you need to report a miscellaneous type of payment included in this form.

What are the filing deadlines for Form 1099-NEC and 1099-MISC?

When filing Form 1099-MISC or 1099-NEC, be sure to submit before the deadlines, which areas follows:

Form 1099-NEC deadline: Form 1099-NEC is due by Jan. 31 of the year following the taxyear covered by the form. This deadline is the same for paper or electronic filing. WhenJan. 31 falls on a weekend or holiday, the deadline is moved to the following businessday. In 2021, for example, this made the actual deadline Monday, Feb. 1. Companiesmust submit the form to the IRS and to contractors by this time.Form 1099-MISC deadline: The deadline for filing Form 1099-MISC with the IRS is March1 if you file on paper or March 31 if you file electronically. However, companies mustsend Form 1099-MISC to recipients no later than Jan. 31 — or a bit later in the case of aweekend or holiday.

Failing to issue forms by these deadlines can result in penalties from the IRS, anywhere fromUS$50 to US$270 per form up to a maximum of US$556,500 within the same year. Thepenalty amount will depend on how late the form is, though you can incur even more seriousfines of at least US$550 per form if the failure to report is not accidental but a deliberatedisregard of the requirement.

What’s the Difference Between 1099-NEC and 1099-MISC Forms?

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Globalization Partners helps you simplify international payroll

Paying workers in your home country and correctly navigating tax laws can be difficultenough. For international companies, payroll and taxes can become exponentially morecomplicated. If legal compliance and HR logistics are distracting from your corecompetencies, then it’s time to outsource these critical tasks to experts.

Globalization Partners offers international payroll services so you can focus on achieving yourcompany’s goals, free of the stress and complications that can come with internationalemployment. With an in-country Employer of Record (EOR), you can ensure legal and taxcompliance in every aspect of the employment process and rest assured your workers areclassified correctly. Request a proposal to learn more.