Whether hired instead of or in addition to full-time employees, freelancers and independent contractors provide critical support for businesses both big and small. If your business is one of the many in the U.S. that works with contractors, you probably know all about the stress of tax time. It can be hard to know which forms you need to send to your workers by what deadlines.
Now that the IRS has reintroduced Form 1099-NEC for use alongside 1099-MISC, it’s up to your business to make sure you issue the right 1099 at tax time. Knowing the difference between the 1099-NEC vs. 1099-MISC is crucial to contractor compliance. As a general rule, most forms of nonemployee compensation should now be reported on Form 1099-NEC, but in some cases, you may need to file a 1099-MISC instead.
Set your business up for a less stressful tax season by staying informed on the differences between Forms 1099-NEC and 1099-MISC and by understanding how and when to file them.
Forms 1099-NEC vs. 1099-MISC: What’s the Difference?
Forms 1099-NEC and 1099-MISC both report compensation that doesn’t fall under the umbrella of full-time employee wages. Both forms help nonemployees and the IRS keep track of taxes owed. However, they serve different purposes and have different deadlines.
Form 1099-NEC is for nonemployee compensation
Form 1099-NEC reports the total amount of nonemployee compensation paid to anyone who isn’t directly employed by a business. Though it was retired in 1983, the IRS brought it back in 2020 to serve as the main form businesses should use to report independent contractor income.
Nonemployee compensation refers to payments made by a business to anyone who isn’t an employee in exchange for their services.
In order to issue a Form 1099-NEC, payments must:
- Total more than USD $600 in a calendar year
- Be made to someone who’s not your employee
- Be for services related to your business or trade
- Be made to an individual, partnership, estate, or, in some cases, a corporation (i.e., a single-member LLC or an LLC taxed as a partnership)
Form 1099-NEC does not report payments made by credit card, debit card, or third-party payment processors like PayPal or Stripe. You should receive Form 1099-K from your financial institution for these amounts.
Form 1099-MISC is for miscellaneous kinds of income
After bringing back Form 1099-NEC, the IRS removed nonemployee compensation from Form 1099-MISC. From the 2021 tax season going forward, the 1099-MISC is used for reporting different types of income that don’t come from directly working for a company.
You would file a 1099-MISC if your business paid:
- At least $10 in royalties or substitute payments in lieu of dividends or interest
- At least $600 in rent; prizes and awards; medical and health care payments, and more
- At least $600 in gross proceeds paid to an attorney
- At least $5,000 in direct sales of consumer products intended for resale
- For a full breakdown of what kinds of payments should be reported on which forms, check the IRS Instructions for Forms 1099-MISC and 1099-NEC
Unlike the 1099-NEC, the 1099-MISC can list a corporation or an LLC taxed as a corporation as the recipient. For example, for over $600 of business-related medical payments made to a hospital, you could list the hospital as the recipient on a 1099-MISC.
Both forms have different deadlines
Comparing the 1099-NEC vs. 1099-MISC, each form has a different deadline, with that of the 1099-NEC being much stricter.
According to the IRS, the 1099-MISC is due to the recipient (e.g., the nonemployee) by Jan. 31unless Box 8 or Box 10 are filled, in which case the deadline is Feb. 15. The deadline to file the 1099-MISC with the IRS and state authorities is Feb. 28 for paper filing and Mar. 31 for e-file.
In contrast, the 1099-NEC is due to both the recipient and the IRS by Jan. 31.
Because the 1099-MISC fulfills multiple reporting purposes, its various filing deadlines serve to accommodate specific requirements for industries like agriculture, law, or fishing. The IRS reintroduced 1099-NEC in 2020 to cut down on its paperwork load and simplify the confusion around filing deadlines. Now, businesses that mainly pay contractors only need to know about the Jan. 31 deadline for 1099-NEC instead of the multiple 1099-MISC deadlines.
How to file Forms 1099-NEC and 1099-MISC
There aren’t many differences in how you file forms 1099-NEC and 1099-MISC. For both forms, you’ll need the same information, and you’ll send copies to the same recipients — the contractor, the IRS, and state tax departments, if applicable. Here’s a step-by-step breakdown of how to file 1099s:
- You’ll need Form W-9, which should be requested from any contractor before they begin working with you. Use the information provided on their W-9 to fill out the recipient portion of their 1099.
- Fill out all the sections on your Form 1099-NEC or 1099-MISC as accurately as possible according to the IRS Instructions.
- Send copies to the IRS (Copy A) electronically or by mail, the state tax department if applicable (Copy 1), and the recipient (Copy B).
- Save a copy for your records (Copy C).
- Whenever you file a 1099 with the IRS or state, make sure to also file a Form 1096. This form identifies the documents included in the information return.
Compliance tips for handling 1099 forms
Form 1099 penalties can seriously add up — filing mistakes could cost you up to $280 per information return. Compliance helps you avoid incurring these penalties.
We’re sharing a few tips to help your team with 1099 tax compliance. Keep in mind that all tax situations are unique. It’s best to consult with your tax advisors to ensure compliance with local filing requirements.
Classify your workers correctly
It’s important to classify your workers correctly as independent contractors or employees, or you may face consequences from the IRS.
While there are several differences between contractors and employees, the IRS looks at three main factors: behavioral control, financial control, and the work relationship.
Because contractors pay their own taxes and employees don’t, they each receive different forms at tax time. Employees fill out W-4s and receive W-2s, while contractors fill out W-9s/W-8 BENs and receive 1099s. Getting your classifications right from the start helps protect your business from tax compliance issues.
File on time or early
Keep track of your filing due dates and file ahead of them to avoid late fees and audits.
Send your Forms 1099-NEC and 1099-MISC to your contractors as early as possible, so you can make changes if necessary before filing with the IRS. This helps you avoid the need to file corrected Form 1099s with the IRS and the state (if applicable) later.
You can set deadlines and virtual reminders or block out time on your HR and accounting teams’ calendars to make sure you file your 1099s.
If you need more time to file your 1099s, you can file Form 8809 to receive an automatic 30-day extension. However, this extension only applies to filing with the IRS and state, not sending a copy to your contractors.
Submit corrections ASAP
If you make any mistakes on your 1099 forms, you can fill out and file corrections. You should do so as soon as possible in order to avoid incurring penalties from the IRS for submitting incorrect information.
Repeat the same steps as filing 1099s the first time to file corrections. First, deliver a copy of the corrected 1099 to the recipient. Then file one with the IRS and state authorities, if applicable, along with a corrected 1096.
Pilot is a faster way to file your Form 1099s
Tax time is complicated enough without having to worry about getting 1099 forms to all of your contractors. Pilot simplifies the process from start to finish and protects you from 1099 penalties along the way.
We automate collecting your Form W-9s when you start working with a contractor, and we fill out and issue your 1099-NECs during tax season. Schedule a free demo of our platform, and see why Pilot is the best choice for companies who hire and pay contractors and employees all over the world.
⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Cover photo courtesy of Kelly Sikkema on Unsplash