Hiring independent contractors for your business can reduce paperwork and tax payments, but it does require using 1099 forms for reporting purposes. There are numerous 1099s to report different types of non-employment income to the IRS during the tax year. In this quick cheat sheet, we’ll break down the differences between Forms 1099-MISC and 1099-NEC and provide step-by-step instructions to streamline the filing process.
First things first…
What is a 1099-MISC form?
The 1099-MISC (or Miscellaneous Information) form is used to report to the IRS certain types of miscellaneous compensation (exceeding $600) made to individuals or non-employees for services. These services include:
- Rent payments
- Prizes and awards
- Cash paid from a notional principal contract to an individual, partnership, or estate
- Payments to an attorney
- Medical and healthcare payments
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) purchased from anyone who makes a living catching fish
- Any fishing boat proceeds
- Other income payments
Other instances when 1099-MISC is used
- To report direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment
- Any taxpayer paid $10 or more in royalties
What is a 1099-NEC form?
Form 1099-NEC (or Non-Employee Compensation) is designed for reporting nonemployee compensation, including payments to independent contractors. If your business pays an independent contractor over $600 for services rendered in a calendar year, issuing a 1099-NEC is mandatory. This form helps the IRS track an independent contractor’s total earnings.
Important to know: What’s the difference between employees and contractors?
Who requires a 1099-NEC?
- Issued to: freelancers, independent contractors, sole proprietors, partnerships
- Not issued to: corporations
The difference between 1099-MISC and 1099-NEC forms
Since 2020, nonemployee pay has been reported on Form 1099-NEC, which generally reports business payments—not personal ones. Before the 2020 tax year, Form 1099-MISC was also used to report nonemployee compensation for independent contractors, freelancers, sole proprietors, and self-employed individuals. Form 1099-MISC is for reporting payments like rent or prizes that are not subject to self-employment tax, whereas Form 1099-NEC is for reporting nonemployee compensation that is likely subject to self-employment tax.
- 1099-MISC only: for reporting specific types of payments besides wages
- 1099-NEC only: for reporting nonemployee compensation
- Both forms: When paying an independent contractor over $600 and over $600 in rent
Note the different filing deadlines:
1099-MISC: File with the IRS by March 1
1099-NEC: File with the IRS by January 31
Best practices for filing Forms 1099-MISC or 1099-NEC
- Before engaging in any business transaction, collect the contractor’s completed W-9 form. Doing so it not only your legal obligation; it’s an important part of staying up to date and prepared at 1099 time. We recommend collecting the W9 before issuing the first payment to any contractor.
- Ensure that the W-9 form is filled out accurately, including the service provider’s name, address, and tax identification or Social Security number
- As of January 1, 2024, any business filing 10 or more 1099s must file electronically.
- Adhere to deadlines. Penalties for late and failed filings can be significant.
- Check individual state requirements for filing 1099 forms.
- Keep accurate records, especially regarding recipients’ taxpayer identification or Social Security numbers.
- Use online services to file electronically for a hassle-free process, ensuring compliance with federal and state requirements.
Your quick cheat sheet for Form 1099-MISC and Form 1099-NEC
|Report payments for miscellaneous income
|Report nonemployee compensation
|Businesses with certain miscellaneous expenses
|Businesses using contractors
|Property owners, prize winners, attorneys, etc.
|Freelancers, independent contractors, sole proprietors
|$10 for royalties or brokers, $600 for all others