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1099-MISC vs. 1099-NEC Tax Form Guide
These tax forms affecting independent contractors and freelancers have changed. Learn how and when to file.
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If your business pays nonemployee compensation and other reportable payments, you must be aware of two forms: Form 1099-MISC and Form 1099-NEC. Many employers are likely familiar with Form 1099-MISC. For years, business owners used it to report payments for rent, royalties, medical and healthcare payments and other nonemployee payments. However, in the 2020 tax year, the IRS introduced Form 1099-NEC, which must now be used to report nonemployee compensation of $600 or more.
We’ll explain the differences between Form 1099-MISC and Form 1099-NEC and share tips to help small business owners, freelancers and contractors avoid common tax errors.
What’s the difference between Form 1099-MISC and Form 1099-NEC?
Form 1099-NEC is used to report nonemployee compensation, such as payments of $600 or more to independent contractors, while Form 1099-MISC reports other types of miscellaneous income, including rents, royalties, prizes, awards and medical and healthcare payments.
The due dates for these forms also differ. Form 1099-NEC is due by January 31 following the tax year, regardless of the filing method. Form 1099-MISC is due by February 28 (or February 29 in leap years) if filed by paper and March 31 if filed electronically.
State requirements
Most states require you to file copies of Form 1099-NEC and Form 1099-MISC. However, the following states are exempt:
- Alaska
- Florida
- Illinois
- Nevada
- New Hampshire
- New York
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
What is Form 1099-NEC?
Form 1099-NEC (shown below) is used to report nonemployee compensation, such as payments of $600 or more to independent contractors. The IRS requires businesses to file this form for each qualifying payee to ensure accurate tax reporting.
While you can view a sample Form 1099-NEC on the IRS website, you cannot print and use the downloaded version for filing. Instead, you must order official scannable copies from the IRS or an authorized vendor or file them online via the IRS’s Filing Information Returns Electronically (FIRE) system.
Form 1099-NEC. Source: IRS
Who gets a Form 1099-NEC?
Self-employed individuals who perform services for a business and receive $600 or more in nonemployee compensation should receive a Form 1099-NEC from the organization that paid them. Businesses must issue this form to individuals, sole proprietors, partnerships and certain limited liability companies (LLCs) that are not taxed as S corporations or C corporations, as they are not W-2 employees of the business.
What is reported on Form 1099-NEC?
Form 1099-NEC is used to report nonemployee compensation, including the following types of payments:
- Service fees
- Bonuses and benefits (for services rendered)
- Commissions
- Prizes and awards (for services performed by a nonemployee)
- Other forms of compensation (for nonemployee services)
How do you file Form 1099-NEC?
Follow these steps to prepare and file Form 1099-NEC:
- Compile payee information. Ensure you have current, accurate information for each payee from their completed Form W-9.
- Order Form 1099-NEC copies (if necessary). You can’t download Form 1099-NEC from the IRS website for official use. You must order IRS-approved, scannable forms directly from the IRS (free of charge) or purchase them from an authorized vendor, such as Amazon or an office supply store. If filing by paper, you must also obtain Form 1096, which summarizes your submission.
- Prepare to file online: If you must file 10 or more Form 1099-NECs, you are required to e-file. If filing fewer than 10, you may still e-file. However, you must apply for a Transmitter Control Code (TCC) to access the FIRE system. This process can take up to 45 days, so plan ahead. (More details on online filing requirements below.)
- Complete your forms. Fill out Form 1099-NEC either manually or using tax software. Be sure to also complete Form 1096 if filing by paper. Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, stressed the importance of completing these forms thoroughly and accurately. “Check to make sure Taxpayer Identification Numbers are correct,” Luscombe advised, as incorrect TINs are a common mistake.
- File and send Form 1099-NEC. Distribute copies as follows:
- Copy A to the IRS, with Form 1096 if filing by paper.
- Copy B to the payee (contractor or vendor).
- Copy C to your records.
- Copy 1 (if applicable) to the state tax authority, following state filing requirements.
Copy A (IRS) and Copy B (payee) must be sent by January 31 of the year following the tax year. If January 31 falls on a weekend or holiday, the due date is the next business day.
Ines Zemelman, an IRS-authorized enrolled agent and founder and President of TFX, emphasized the importance of timely filing. “Extensions are not available for Form 1099-NEC,” Zemelman cautioned.
What is Form 1099-MISC?
Form 1099-MISC is used to report certain types of miscellaneous income of $600 or more paid to an individual, partnership or LLC, excluding nonemployee compensation (which is reported on Form 1099-NEC). Common payments reported on Form 1099-MISC include rent, royalties, legal fees (if not for services) and prize winnings.
Form 1099-MISC. Source: IRS
Who gets a Form 1099-MISC?
Businesses must issue Form 1099-MISC to individuals, sole proprietors, partnerships and LLCs that receive $600 or more in miscellaneous income, excluding nonemployee compensation. Common recipients include landlords, attorneys (for certain payments) and prize or award winners.
What is reported on a 1099-MISC?
Form 1099-MISC is used to report miscellaneous payments of $600 or more that do not fall under nonemployee compensation. The following payment types should be reported:
- Payments to an attorney: Box 10 is used for payments to attorneys, law firms and corporations related to legal settlements in business lawsuits. Notably, Form 1099-NEC should be used for attorneys’ fees paid for services.
- Other income: Box 3 (“Other income”) is used for payments like awards and prizes, including cash and merchandise. This form is issued when someone receives $600 or more but note that gambling winnings should be reported on Form W-2G instead.
- Healthcare: You’ll report payments your company paid to healthcare providers, healthcare insurance companies, doctors, suppliers, etc., in box 6. It is not necessary to report payments to pharmacies for prescription drugs.
- Royalties: Royalties totaling $10 or more during a calendar year must be reported in box 2. Royalties include business copyrights, patents and oil, gas and mineral rights.
- Rents: Box 1 is used to report rent payments, including commercial property leases, farmland rentals and equipment rentals. Payments made to real estate agents or property managers do not require a Form 1099-MISC. Additionally, machine rental payments should be reported here, but payments to machine operators belong on Form 1099-NEC.
For a complete list of reportable payments, visit the IRS website’s 1099-MISC page.
