1099-MISC vs 1099-NEC: Differences and Instructions

Hiring an independent contractor can be very beneficial for most companies. Once finding the perfect candidate your company finally hires a contractor to perform the work needed. 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.

Let’s back up a bit. 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 a 1099 employees they had to file form 1099 in 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 these two forms?

To comply with any 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.

1099-MISC

• Used to report payments made to non-employees, such as independent contractors (or anyone 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

1099-NEC

• 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 form 1099-NEC and 1099-MISC, check out the chart below:

Now that we’ve covered the differences between the two forms, 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, prices, 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:

• Rents
• 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 slightly 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 nonemployee 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 a 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, this does not apply to international contractors based outside of the U.S.

With all the recent regulations and changes to Form 1099-MISC and the introduction of Form 1099-NEC, it’s important file each of these correctly.

How do you file Form 1099-NEC and Form 1099-MISC?

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.

You ‘ll also want to follow these guidelines when filing Form 1099-NEC or 1099-MISC:

1. 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.
2. 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 your 1099.
3. Work and receive payment – Once you’ve submitted the relevant information to the employer, you need to receive the payment.
4. Prepare a 1099 – You’ll need 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.
5. 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 their guidelines.

Before filing either form though, 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 understand the difference between the two 1099 forms and how to file them.

Take the guesswork out of the process with an automated platform like Papaya Global. Our global workforce and payroll management solution can smoothly navigate the bureaucracy of tax returns while remaining compliant with all local laws.

Learn how we can help you comply with local labor laws by scheduling a demo.