1099 NEC vs 1099 MISC

If you hire 1099 workers (i.e. any non-payroll workers), 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. 

This article is part of our guide on independent contractor taxes.

What is Form 1099 NEC?

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.

Back in 1983 – the IRS changed the process for companies to declare the payments that they made to independent contractors. While it had traditionally been submitted using the Form 1099-NEC, the IRS decided to add a new box on Form 1099-MISC to include this information, making 1099-NEC obsolete.

The idea was to make it easier for companies, providing a single form where they could include all worker compensation from employees to independent contractors.

However, businesses have found the concept of submitting one form for both employees and non-payroll workers, but with two separate filing deadlines, very confusing.

To clarify things for businesses, the IRS decided that as of 2020, Form 1099-NEC would be re-introduced as a requirement for businesses to submit payment information for self-employed workers.

What is Form 1099 Misc?

1099 Misc tax form is used by companies to report on certain types of miscellaneous compensation, such as rents, prizes and awards, healthcare payments, and payments to an attorney.

In 83′ The IRS added a new field to report the compensation they paid to the non-payroll workers (freelancers, consultants, gig workers etc.). This has made the 1099 NEC redundant, and it was put out of use.

However, merging non-payroll worker compensation into theForm 1099 MISC created some confusion for employers and the decision.

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-payroll workers 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.

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. 

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).

1099 workers are self-employed individuals who don’t have a single employer, but rather own their own business. The following types of self-employed individuals are categorized as 1099 workers.

  • 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.

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:
    • Rents
    • 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.