1099-MISC vs 1099-NEC: Differences and Guidelines
Erez Greenberg| Dec 26, 2022
Hiring an independent contractor can be beneficial for the specialized needs of many companies. As a finance manager, you’ll need to know the tax requirement for foreign contractors, and whether you need to file a Form 1099-MISC or form 1099-NEC.
Here’s how the two forms came about. Before the IRS introduced form 1099-NEC, businesses had to juggle different deadlines for each payment type on tax form 1099. For example, in cases where business hire 1099 employees they had to file form 1099 within its specific deadline. In order to create a more straightforward process, the IRS reintroduced Form 1099-NEC, which has a single filing deadline for all payments that use the form.
What’s the difference between these two forms and how do you file for each of them?
What’s the difference between them?
To comply with local labor laws and protect your global workforce, it’s essential to know when to file for a 1099-MISC vs a 1099-NEC. Let’s go through the differences.
- Used to report payments made to non-employees, such as independent contractors (or anyone from whom they’ve withheld federal income tax) over the calendar year
- 1099-MISC reports payments not subject to self-employment tax like rent or awards
- Especially common for individuals and businesses who own real estate or buy supplies for clients, such as rental property management companies
- Required for individuals who make more than $600 from businesses during a single year
- Reports tax-deductible, non-employee compensation (NEC) payments by businesses and individuals
- Required for individuals who make more than $600 from businesses during a single year
- Used by freelancers, independent contractors, or other independent service providers who aren’t employed by a business as a full-time employee
- More common than form 1099-MISC with the self-employed and service businesses
For a more detailed breakdown of the IRS forms 1099-NEC and 1099-MISC, check out the chart below:
|Form||Sent or not sent to recipient||Submitted / not submitted to the IRS||Can be submitted online||Filing deadline||Types of payments it records|
|1099-MISC||Yes||Yes||Yes||March 1 (March 31st if filing online).||Rents, prizes and awards, other income payments, medical and health care payments|
|1099-NEC||Yes||Yes||Yes||January 31||Fees, commissions, prizes, and awards|
Now that we’ve covered the differences between the two, let’s dig more into form 1099-MISC.
What is Form 1099-MISC?
1099-MISC tax form covers compensation to independent contractors. It reports payments that aren’t subject to self-employment tax (rent, royalties, and so on).
Before 2020, if your business paid freelancers, contractors, or other non-employees $600 or more during the year, you would issue a 1099-MISC and send a copy to the independent contractor.
But in 2020, the IRS redesigned 1099-MISC and required reporting:
- Prizes and awards
- Medical and healthcare payments
- Direct sales of $5000 or more
- Crop insurance proceeds
- Golden parachute payments
Now, businesses use 1099-MISC for several reasons. You still need to file a 1099-MISC whenever you pay an independent contractor $600 or more in a single year for rent, attorney payments, prizes, medical payments, and more. However, the newly revised 1099-MISC does not include non-employee compensation and now indicates the payer made sales of $5,000 or more.
For example, companies who sell products to sellers at wholesale price and pay sellers with bonuses, commissions, or prizes, will check box 7 on 1099-MISC and submit form 1099-NEC.
As of 2020 though, businesses that hire independent contractors will need to use Form 1099-NEC, or depending on which payments they make, a combination of Form 1099-MISC and Form 1099-NEC.
What is Form 1099-NEC
Form 1099-NEC stands for non-employee compensation, which includes any amount you pay to a worker classified as an independent contractor. Non-employees include anyone hired on a contract basis to complete work performed by architects, designers, accountants, software developers, or attorneys.
Companies must fill out a 1099-NEC for self-employed or independent contractors if they paid them $600 or more for their services during a single tax year. Note that this does not apply to international contractors based outside of the US.
How are Form 1099-NEC and Form 1099-MISC filed?
Filing a 1099-MISC or 1099-NEC is your responsibility as a business or employer. First, your contractor must fill out their tax details on Form W-9. Then, you can file Form 1099-NEC or 1099-MISC with the IRS. You’ll need to file two copies: Copy A for the IRS and Copy B for the contractor. You can also keep a copy for your own records.
The form can be filed electronically or via mail, but filing via mail requires requesting a physical copy of the form from the IRS. When filing this way, you’ll need Form 1096, which summarizes the other forms.
You can file 1099-NEC or 1099-MISC electronically with the IRS’s Filing Information Returns Electronically (FIRE) system. In order to register, mail Form 4419 to the IRS. Be sure to submit the 4419 at least 30 days before Form 1099-NEC or 1099-MISC is due.
Workers will need to follow these guidelines when filing Form 1099-NEC or 1099-MISC:
- Qualify – You need to qualify to file a 1099-NEC or 1099-MISC, either by winning a prize or getting hired as an independent contractor.
- Fill out a W-9 – After meeting the criteria, you’ll need to fill out a W-9, which provides the employer of record the information they’ll need when filling out the 1099.
- Work and receive payment – Once you’ve submitted the relevant information to the employer, you need to receive the payment.
- Prepare a 1099 – Employer needs to submit a 1099-MISC or 1099-NECby Jan. 31 (or March if it’s a 1099-MISC), sending one copy going to the IRS and another to the payee.
- File taxes – When the contractor receives their 1099, they’ll report their income on their tax return before the deadline (April 15, or Oct. 15 if they file an extension).
For more information on Form 1099-NEC’s instructions, check out the IRS’s guidelines.
Before filing either form, check out this list of requirements.
Practical points to note when filing 1099-MISC and NEC
You’ll need to know specific information to fill out these forms correctly. For Form 1099-NEC, this means:
- Verifying that the recipient’s taxpayer ID is correct. You’ll need a W-9 from each recipient with the current taxpayer ID before you submit Form 1099-NEC
- Giving all recipients a copy by January 31st
- Filing via paper or electronically with the IRS by Jan. 31st
- Not using 1099-NEC to report personal payments or employee salaries. For employee wages, use Form W-2.
When filing for 1099-MISC, you’ll need to check off Box 7 if you made sales of $5,000 or more. You’ll also need to report:
- Crop insurance proceeds in Box 9
- Gross proceeds to an attorney (not fees) in Box 10
- Section 409A deferrals in Box 12
- Nonqualified deferred compensation income in Box 14
The deadlines for Form 1099-MISC depend on if you fill out Box 8 or 10. The deadline to give a copy to independent contractors is Jan. 31 if you don’t check box 8 or 10, but Feb. 15 if you do.
File correctly with a strategic workforce management platform
Whether you’re filing a 1099 form for a foreign contractor, 1099 for an overseas contractor, or a domestic worker, you’ll need to stay on top of the varying form requirements and regulations.
Papaya Global removes the guesswork and complexity from IRS forms and everything else workforce related. We ensure local compliance with the use of local payroll engines designed to process payroll while complying with local rules. Our unified agnostic payment platform smoothly navigates the bureaucracy of tax returns in over 160 countries, supporting all employment types with full control and visibility.
Learn how we can help you comply with local labor laws – and so much more – by scheduling a demo.
Can I use a 1099-MISC instead of NEC?
Businesses cannot swap the 1099-MISC for Form 1099-NEC. The 1099-MISC form is still around, but it’s used to report miscellaneous income such as rent or attorney fees. From 2020, the IRS required all contractor payments to be reported on form 1099-NEC.
How do you report a 1099-NEC?
If you pay independent contractors, you may have to file Form 1099-NEC, Nonemployee Compensation to report any payments. If you file Forms 1099-NEC on paper, you must also submit Form 1096, Annual Summary and Transmittal of U.S. Information Returns. According to the IRS, if you file more than one type of return on paper (1099-NEC, 1099-MISC, and so on), you need to prepare a separate Form 1096 for each type of return.
How do I report a 1099-NEC on my tax return
You need to use Box 1 on your 1099-NEC Form(s) to report self-employment income. As a self-employed person, you’ll report any income and deductions on Schedule C. Those who are self-employed will need to report all of their self-employment income.
Does reimbursed expenses included in 1099-NEC?
Independent contractors or those who are self-employed need to include all self-employed income and expenses. Next, you’ll report any travel expenses in full. The recipient can deduct that amount when filing their individual tax return.
How much is 1099-MISC income tax?
The total income tax is 15.3%. If you file taxes with a 1099 form, you also need to pay an additional 7.65% in taxes. This comes to a total of 15.3% in payroll taxes. Of the total payroll tax, you can deduct between 50% and 57% from your taxable income.
What happens if I file form 1099-MISC instead of form 1099-NEC?
If you filed form 1099-MISC instead of a 1099-NEC, you’ll need to contact the issuer. The issuer then needs to follow the guidelines created by the IRS or they’ll face a penalty. If you filed the wrong form, the issuer would need to correct their error and issue a corrected 1099-MISC with no income and a 1099NEC with the accurate income.