1099-NEC vs 1099-MISC: Differences, deadlines, and how-to’s

Form 1099-NEC is used to report payments of $600 or more made to independent contractors and freelancers for their services. Form 1099-MISC is used to report other types of income, such as rent, royalties, and prizes. The key for small business owners is to understand which form to use to ensure compliance with IRS regulations and avoid penalties.

You’ve had a successful year running a thriving digital marketing agency in Chicago. By hiring several freelancers, contractors, consultants, and gig workers for your marketing department, you’ve successfully avoided the expensive overhead of full-time in-house employees. 

But tax season is approaching, and you’re staring at a stack of financial documents, unsure of which form to complete and file for each of these non-payroll workers: 

Forms 1099-NEC or 1099-MISC? 

Either that, or you’re one of the 45% independent contractors in the US ^[1], working for this Chicago-based marketing agency, wondering which of these forms applies to you. 

Moreover, there has been greater confusion about it since 2020, when the IRS revived the old Form 1099-NEC ^[2] which hadn’t been in use since 1983. 

Before 2020, all payments to independent contractors were reported using the 1099-MISC form, but now the IRS requires non-employee compensation to be reported separately using Form 1099-NEC. This change aims to make the reporting process simpler but has introduced new deadlines and filing procedures that small business owners and 1099 employees need to be aware of.

In this blog, we’ll break down the differences between the 1099-NEC and 1099-MISC forms, outline the filing requirements and deadlines, and provide a step-by-step guide on how to file them correctly. By understanding these distinctions, you can ensure compliance with IRS regulations and avoid costly penalties.

What is Form 1099-NEC?

Form 1099-NEC, introduced by the IRS in 2020, is used specifically to report non-employee compensation. This form is crucial for businesses that hire independent contractors, freelancers, or gig workers. 

Non-employee compensation includes any payments made to individuals who are not on your payroll but provide services to your business. For example, if you hired a freelance graphic designer to create a new logo for your company and paid them $1,000, you would report this payment on Form 1099-NEC.

Do per diem employees receive Form 1099-NEC?

No, per diem employees do not receive Form 1099-NEC. Instead, they are considered employees and should receive a Form W-2 ^[3], which reports their wages, tips, and other compensation. If you have per diem employees, you should treat them as regular employees for tax reporting purposes and provide them with a W-2.

Filing requirements

To determine if you need to file Form 1099-NEC, consider the following criteria:

• You made payments totaling $600 or more to an individual during the tax year.
• The payments were for services provided by someone who is not your employee.
• The individual is not incorporated as a C corporation or S corporation. Payments to these types of businesses are generally not reported on Form 1099-NEC. You can find this information on the contractor’s Form W-9 ^[4].

Let’s look at an example to illustrate when you would use Form 1099-NEC:

Imagine you own a café and hire a freelance photographer to take photos for your new menu. You pay the photographer $750 for their services. This payment must be reported on Form 1099-NEC because it is non-employee compensation.

Filing process: How to file form 1099-NEC

To file Form 1099-NEC, follow these steps:

1. Gather necessary information

Before you can fill out Form 1099-NEC, you’ll need the contractor’s information. This includes their legal name, address, and Taxpayer Identification Number (TIN), which they should provide on Form W-9.

2. Fill out the form

Form 1099-NEC consists of two copies. Copy A is for the IRS, and Copy B is for the contractor. You will need to report the total amount you paid to the contractor in Box 1 (Nonemployee Compensation).

3. Submit Copy A to the IRS

You can submit Copy A either electronically or by mail. If you choose to file electronically, you will use the IRS FIRE (Filing Information Returns Electronically) system.

To do this, you need a Transmitter Control Code (TCC), which you can request by submitting Form 4419 ^[5] to the IRS at least 30 days before the filing deadline. If you prefer to mail it, you can order physical copies of Form 1099-NEC from the IRS website and include Form 1096 ^[6]as a cover sheet.

4. Send Copy B to the contractor

You must provide Copy B to the contractor by January 31 of the following year. You can send it via mail or email, but if you choose to email it, you must obtain the contractor’s consent.

Deadlines

The deadline to file Copy A of Form 1099-NEC with the IRS is January 31 of the year following the tax year in which the payments were made. 

The same deadline applies for providing Copy B to the contractor. As a business owner, it’s crucial for you to meet these deadlines to safeguard your business from unwanted penalties.

What is Form 1099-MISC?

Form 1099-MISC is used to report various types of miscellaneous income that are not covered by other specific 1099 forms. This includes payments such as rent, royalties, and prizes, among others. Before 2020, this form was also used to report payments to independent contractors, but now those payments are reported on Form 1099-NEC.

Filing requirements

To determine if you need to file Form 1099-MISC, consider the following criteria:

1. You made payments of at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
2. You paid at least $600 for:

• Rent payments
• Prizes and awards
• Other income payments
• Medical and health care payments
• Crop insurance proceeds
• Cash payments for fish or other aquatic life purchased from a fishing business
• Cash paid from a notional principal contract to an individual, partnership, or estate
• Payments to attorneys
• Proceeds from fishing boats

Let’s look at an example to illustrate when you would use Form 1099-MISC:

Suppose you host a marketing contest for your small business and award a $750 cash prize to the winner. Since the prize amount exceeds $600, you need to report it on Form 1099-MISC. To do this, collect the winner’s legal name, address, and Taxpayer Identification Number (TIN) using Form W-9, then fill out the 1099-MISC accordingly. This ensures compliance with IRS regulations.

Filing process: How to file form 1099-MISC

To file Form 1099-MISC, follow these steps:

1. Gather necessary information

Collect the recipient’s information, including their legal name, address, and Taxpayer Identification Number (TIN), which they should provide on Form W-9.

2. Fill out the form

Form 1099-MISC consists of several copies. Copy A is for the IRS, Copy 1 may be required for your state tax department, Copy B is for the recipient, Copy 2 is also for the recipient (if needed for state tax return), and Copy C is for your records. You will need to report the total amount paid in the appropriate boxes on the form.

3. Submit Copy A to the IRS

You can submit Copy A either electronically or by mail. If filing electronically, use the IRS FIRE system ^[7]. If filing by mail, you can order physical copies of Form 1099-MISC from the IRS website and include Form 1096 as a cover sheet.

4. Send Copy B to the recipient

You must provide Copy B to the recipient by January 31 of the following year. You can send it via mail or email, but if you choose to email it, you must obtain the recipient’s consent.

Deadlines

The deadline to file Copy A of Form 1099-MISC with the IRS is March 1 if filing by paper and March 31 if filing electronically. The deadline to provide Copy B to the recipient is January 31 of the following year. Meeting these deadlines is crucial to avoid any penalties and keep your business running smoothly.

Key differences between 1099-NEC and 1099-MISC

Tips for small business owners working with 1099 employees

1. Double-check information

Ensure all information on the forms is accurate to avoid delays or rejections. Incorrect or incomplete information can lead to complications and additional follow-up.

2. Keep records

Keep copies of all submitted forms and supporting documents for your records. This is vital in case of audits or discrepancies. Having proper documentation on hand can help quickly resolve any issues that might come up.

3. Meet deadlines

Make sure you follow all IRS deadlines to avoid penalties. Mark important dates on your calendar to stay organized. For Form 1099-NEC, the deadline is January 31, and for Form 1099-MISC, it’s March 1 if filing by paper or March 31 if filing electronically.

4. Understand the penalties for late filing

If you miss the filing deadline, you will incur penalties based on how late the forms are submitted:

• $50 if you file within 30 days of the deadline.
• $100 if you file more than 30 days late but before August 1.
• $260 if you file on or after August 1.

The penalty amount is determined by when you file the correct information return. If you cannot file on time, you can request an extension by submitting Form 8809 ^[8] to the IRS. However, this extension does not apply to providing the 1099-NEC forms to contractors, which must still be supplied by January 31.

5. Understand state filing requirements

State filing requirements for Forms 1099-MISC and 1099-NEC vary depending on the state. Some states require you to file these forms with the state, while others do not have such requirements.

States exempt from 1099 filing include: 

• Alaska
• Florida
• Illinois
• Nevada
• New Hampshire
• New York
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

If you are a business or independent contractor operating in these states, you do not have to submit 1099 forms to the state.

The bottom line

Forms 1099-NEC and 1099-MISC are essential for reporting payments to independent contractors and other types of miscellaneous income. Accurately completing these forms and submitting them to the IRS by the deadline is vital to avoid penalties and ensure compliance.

Proper bookkeeping is equally important, as it involves maintaining accurate records of all financial transactions, including payments to independent contractors, ensuring the information is readily available and accurate when it’s time to file.

Managing these tasks, in addition to your core responsibilities as a small business owner, can be overwhelming. With CoCountant’s tax reporting and bookkeeping services, you can easily keep track of who you’ve paid and how much. This makes completing these forms straightforward and less time-consuming, all while ensuring these forms are filled out correctly and submitted on time, preventing issues with the IRS.

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