A Comprehensive Guide to Forms 1099-MISC and 1099-NEC

Ines Zemelman, EA
Ines Zemelman, EA
• 15.08.22 • 5 min read

Up until 2020, if you were a small business owner who hired contracted work or yourself worked as a freelancer, you either received or were issued a 1099-MISC to report your income. Now, the IRS has adopted Form 1099-NEC to report independent contractor income, which is officially referred to as non-employee compensation.

In short, to simplify a persistent issue for businesses, the IRS has reintroduced a form that lost favor in the 1980s. If you work for contractors or undertake contracting work as a self-employed individual, here is all you need to know about forms 1099-MISC and 1099-NEC.

What Is Form 1099-NEC?

Form 1099-NEC was developed in the 1980s under President Ronald Reagan, and it was a fairly simple form to report self-employed income. Its main part included a box where you could report how much money you made as a self-employed individual. 

But in 1983, the IRS added a new box to Form 1099-MISC so businesses could report payments to self-employed people who worked with them during the tax year.

How did this impact 1099-MISC other income or nonemployee compensation? Form 1099-MISC replaced Form 1099-NEC in reporting non-employee compensation and many other non-employee payments, including rents, awards, prizes, and medical payments.

This modification, however, contributed to the confusion of whether to use 1099-NEC or 1099-MISC. Businesses that filed Form 1099-MISC were obliged by the IRS to report payments by two distinct deadlines. Businesses had until January 31 to send Form 1099-MISC to self-employed individuals who worked with them, but they had until February 28 to deliver it to everyone else. To eliminate this confusion, the IRS decided in 2020 to reinstate Form 1099-NEC with a January 31 due date. Another rationale for Form 1099-NEC's return was that it would have the same deadline as the W-2, which is generally due on January 31.

What Is Form 1099-MISC?

The 1099-MISC form is among the many 1099 form series, and it is one of the most commonly used ones. Soon after a tax year ends, taxpayers receive 1099s, mainly Form 1099-MISC, and use the data to report their income. 

If you operate a business or trade and accept payments from other organizations or people, these transactions will probably be declared to you and the IRS if they exceed a specific threshold during the tax year. In the event of payments for rent, prizes and awards, royalties, and substitution payments in place of dividends and other items, the IRS requires the amounts received to be reported on 1099-NEC or 1099-MISC if the payments reflect nonemployee compensation.

1099-NEC or 1099-MISC: What Is The Difference Between These Forms?

When it comes to the difference between forms 1099-MISC and 1099-NEC, the key difference is the staggering filing deadlines. Also, Form 1099-NEC has effectively separated specific data from Box 7 of the 1099-MISC.

To use the "reinstated" 1099-NEC correctly and avoid the confusion of whether to use form 1099-NEC or 1099-MISC, you must clearly understand what constitutes non-employee compensation. Essentially, they are any payments made to self-employed people, freelancers, independent contractors, suppliers, and other non-employee service providers (commonly known as 1099 workers). Again, this is the same information that was in Box 7 of the 1099-MISC in the past.

The IRS defines a reportable pay in Box 1 of the 1099-NEC as a combination of the following four conditions:

  • It's for someone who isn't one of your employees.
  • It's designed for your services as part of your trade or business.
  • It was given to a person, partnership, estate, or occasionally a company.
  • Payments totaled at least $600 for the entire year.

In addition, regardless of the amount, you must file Form 1099-NEC (report in box 4) for anybody whose federal income tax you withheld under the backup withholding regulations.

Practical Points of The 1099-NEC

Having a clear understanding of forms 1099-MISC and 1099-NEC helps in reporting your income and filing your taxes accurately. Follow these crucial dos and don'ts while dealing with the new 1099-NEC form for the smoothest experience possible:

  • Verify that the taxpayer identification number of the recipient is accurate. Before completing Form 1099-NEC, you should have a Form W-9 from each receiver with the current taxpayer identification number.
  • Distribute by January 31st to all recipients.
  • Do submit your tax return to the IRS by January 31st, either on paper or electronically.
  • If you're reporting personal payments, don't use Form 1099-NEC.
  • Form W-2 should be used instead of Form 1099-NEC to report employee earnings.

Understanding 1099-MISC

Form 1099-MISC was changed by the IRS because it wouldn't ask about non-employee compensation.

The biggest change is that Box 7 must now be checked if the payer made $5,000 or more in direct sales. There is more reporting done in these areas:

  • Box 9 is for money from crop insurance.
  • Box 10 is for a lawyer's gross proceeds (not fees).
  • Box 12 is for postponements under Section 409A.
  • Box 14 is for Income from deferred pay that is not qualified.

How To File Forms 1099-NEC and 1099-MISC?

Having understood what forms 1099-NEC and 1099-MISC, particularly the difference and the changes therein, it is now time to file forms 1099-NEC and 1099-MISC. This section deals with instructions for the aforesaid forms.  

Instructions For Forms 1099-MISC And 1099-NEC

Form 1099-NEC

There are two identical copies of each Form 1099-NEC that will be filled out: Copy A and Copy B. If you paid an independent contractor more than $600 a year, you must declare their entire earnings. You'll need Copy A for the IRS and Copy B for the contractor. If you are an independent contractor and receive Copy B, it is not your job to file Form 1099-NEC. Nevertheless, you should ask your client for a copy of the form for your records. You will write down all of your income on Schedule C.

Form 1099-MISC

Both copies of the 1099-MISC form, Copy A and Copy B, can be submitted electronically or physically. They must be delivered by January 31. A Form 1096 (transmittal form) is required for all 1099s mailed to the IRS, and the IRS must receive it by January 31.

Here is what you need to do:

  • Find out who you need to file for by looking for all payments over $600 and then sorting them based on IRS rules.
  • Get information on Form W-9.
  • Copy A and B of the 1099-MISC should be filled out for each independent contractor.
  • Send by the deadline to the IRS, independent contractors, and the state (if necessary).

1099-NEC Deadlines & Penalties

There are some deadlines and penalties on submitting forms 1099-MISC and 1099-NEC on due dates. Copy A of Form 1099-NEC must be submitted to the IRS by January 31 of the following year. If this date falls on a non-business day, the submission deadline will be the following business day.

Copy B of Form 1099-NEC must be provided to contractors by January 31 of the subsequent year. If you don't pay before the due date, you'll be hit with a penalty. 

These penalties include:

  • $50 if filed within thirty days.
  • $100 if you file after the 30th day but before August 1st.
  • $260 if you submit on or after August 1st.

The amount will be dependent on when you file the accurate information return. Form 8809 can be used to request an extension if you would be unable to file by the due date. However, you must still provide any contractors with the 1099-NEC paperwork by January 31.

Conclusion

Tax season can be stressful, and deciding which form to use to report your income can further add to the stress. The IRS has reintroduced form 1099-NEC in 2022, creating confusion about whether to use form 1099-NEC or 1099-MISC. This post has answered questions about when and how to use forms 1099-MISC and 1099-NEC. If you are still confused and do not want to get into trouble with the IRS, you may consider getting help from a tax professional.