If you hire 1099 workers (i.e. any non-payroll staff), you may already be familiar with the 1099 tax forms you need to complete and file every year, but here’s a simple breakdown of 1099 NEC vs. 1099 MISC
However, a change from the IRS in 2020 is causing some confusion. Instead of Form 1099 MISC, the IRS announced last year it was reviving an old tax form, 1099 NEC, which hadn’t been in use since 1983.
From tax year 2020 on, companies that hire non-payroll workers and pay them more than $600 must provide them a 1099 NEC by January 31.
If this is too many acronyms and numbers for you, check out the rest of this post to better understand the differences so you can know which tax form to submit, when and how.
This article is part of our guide on independent contractor taxes.
Who qualifies as a 1099 worker?
Before we dive into the differences between 1099 NEC vs. 1099 MISC, let’s recap who counts as a 1099 worker (and therefore requires a 1099 form).
- Freelancer: Many self-employed knowledge workers go by the term “freelancer.” These folks pick and choose which projects they want to work on, set their own rates, and determine their own pay structure. Many freelancers work with multiple clients concurrently.
- Independent contractor: Similar to freelancers, independent contractors choose their work and pay. One of the main differences, though, is that they usually establish longer-term work relationships with one or two clients. While some independent contractors are paid by the hour, it’s also common that they seek a retainer.
- Consultant: A consultant is a self-employed professional with extensive skills, experience, and knowledge in their respective field. Because of their expertise and training, consultants usually charge a premium rate.
- Gig worker: A gig worker performs temporary, flexible jobs, often through an online app or platform. They are usually paid for each task, not by the hour.
- Contractor: A contractor refers to a self-employed person who finds work through a vendor or agency. Depending on the company’s structure, workers may report to a manager and receive regular payments through the agency.
What’s the difference between Forms 1099 NEC and 1099 MISC?
If you know a little bit of the history of the 1099 MISC and 1099 NEC forms, it’s easier to understand how they differ.
In the early 1980s, the IRS introduced Form 1099 NEC, a simple form that self-employed individuals used to report any money they earned in the last tax year.
Then, in 1983, the IRS added a field to the 1099 MISC form (which already existed), for businesses to report the compensation they paid to the non-payroll workers, along with rents, prizes, awards, and medical payments. Since all of this information was added to Form 1099 MISC, the 1099 NEC became redundant, and it was put out of use.
However, Form 1099 MISC created some confusion for employers.
Businesses needed to use it in two cases: to pay self-employed individuals with whom they do business, and to all other payees (i.e. royalty payments, brokers, etc.) These two cases also came with different deadlines. The form was due by January 31 for non-payroll workers, and by February 28th for payees.
To resolve this confusion, the IRS decided in 2020 that it would bring back Form 1099 NEC. Now, employers are required to use Form 1099 NEC to report compensation to non-payroll staff, and it’s due January 31.
However, Form 1099 NEC doesn’t replace Form 1099 MISC. It only took over the non-employee compensation component from 1099 MISC.
Please note that these forms apply only to US-based companies. UK-based companies should follow the IR35 guidelines. In addition, all payments to non-US citizen workers should be reported through form 1042-S and not 1099 NEC.
Who does my company need to send a 1099 NEC to?
Now that we’ve covered the history of the two tax forms (riveting, we know!), you’re probably looking for some actionable answers about who needs which form.
Form 1099 NEC is for reporting non-employee compensation.
If a self-employed individual provided your company services worth at least $600 in the last tax year, you need to issue them a Form 1099 NEC. (Note: You must only report compensation for services on this form — not any other types of payment.)
You will also need to file Form 1099 NEC for each person you withheld federal income tax under the backup withholding rules, even if the payment was for less than $600.
Who still needs a 1099 MISC?
The purpose of the 1099 MISC is to report payments and miscellaneous income. The types of payments that fall into this category include:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
- At least $600 in the following:
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
- Payments to an attorney
- Any fishing boat proceeds
So, if you paid any non-payroll staff $600 or more for any of the above, you must provide a Form 1099 MISC.
Don’t forget Form 1096
As if you don’t have enough tax forms on your plate, we’re just putting this reminder here: whenever you file a 1099 form, you must also complete and file Form 1096, the Annual Summary and Transmittal of U.S. Information Returns. This form summarizes all of the 1099s you file.
1099 NEC vs. 1099 MISC: Know when to file each
Staying on top of changes from the IRS isn’t always easy, but it’s crucial if you want to avoid mistakes and major accounting headaches.
When it comes to correctly filing tax forms for your freelancers, contractors, consultants, and gig workers, understanding the difference between 1099 NEC vs. 1099 MISC is the first step.