1099 NEC vs 1099 MISC: What's the Difference and What You Need to Know?

In 2020, the IRS re-introduced the 1099-NEC form to report independent contractor income, also known as non-employee compensation.

Before the change, freelancers, contractors, self-employed individuals, and other contingent workers received a 1099-MISC, which is now only used for certain types of payments, such as rent, royalties, and other information regarding independent contractor income.

With over 20 types of 1099 tax forms, it can be difficult to understand the nuances of the different forms (you need a Form 1099-S to report payments from Real Estate Transactions, for example).

In this article, we will walk you through the differences between the 1099-MISC form and 1099-NEC form that was introduced in 2020. We will also include important tips for everything you need to know about classifying full-time vs. contingent workers.

Who needs to file a 1099-NEC form?

If your business paid a contractor more than $600 in one tax year, your HR or finance department must issue a 1099-NEC for the individual. The only exception is when the independent contractor or freelancer is registered as a C or S corporation on their W-9 form.

To file a 1099-NEC form for a contractor, you will need their:

• Address

• Taxpayer identification number, such as SSN, ITIN, or EIN

• In certain cases, you might also need their:

• Legal or business name

• Business entity type, such as sole proprietor, partnership, or corporation

Many payroll services, including Via, will automatically file your 1099-NEC with the IRS and mail each payee a copy after a payment has been made.

Note: Before 2020, independent contractors had their income reported in box 7 of the 1099-MISC form. This is no longer the case.

When is a 1099-NEC form not required?

You will need to carefully review the contractor’s Form W-9 to determine if the individual is registered as a C corporation or S corporation. If they are registered as either, your business will not need to file a 1099-NEC. Consult with a small business tax expert if you’re unsure how to proceed.

Why did the IRS re-introduce the 1099-NEC form?

The 1099-NEC was reintroduced in 2020 to help ensure that contractors were being classified correctly by the IRS.

The rise of the freelancer

The internet has made it possible for more types of people to engage in contract work. Think Uber drivers, freelance writers, and technology consultants. With so many more people working in the gig economy, the IRS wanted to keep better track of independent contractor income using a new form.

Tax fraud

The 1099-MISC form is due in March, a few months after companies need to issue the W-2 to employees on payroll. When the IRS decided to introduce the 1099-NEC form, they made sure it had the same filing deadline as the W-2. This new change reduces the likelihood that companies will engage in tax fraud by misclassifying full-time employees as contractors.

Who receives a 1099-MISC form?

Independent contractors receive a 1099-MISC form when they earn income from the following sources:

• Royalties from book, music, TV, film or media sales

• Rent payments

• Prizes

• Awards

• Medical and healthcare payments

• Legal payments made to attorneys

• Cash payments to professional fisherman for aquatic life

• Crop insurance proceeds

• Other income payments

Organizations are required to send a 1099-MISC to report recipients who earn more than $10 in royalties or $600 in the other categories. Not reporting this income and payment information is illegal.

What is the deadline for submitting the 1099-NEC?

Businesses must file the 1099-NEC form by January 31 of the following tax year at the latest. If January 31 falls on a weekend, then the businesses must submit the forms by the following business day, either February 1 or 2. You can start the process to file the 1099-NEC form directly on the IRS website or by mail.

The deadline for submitting the 1099-NEC is the same day as submitting the W-2.

If your business hired a contractor and paid them more than $600 a year, you must file Form 1099-NEC with the IRS (Copy A) and send a copy to the contractor (Copy B).

If you submit the 1099-NEC form late, you’re subject to a penalty ranging from $50 to $260, depending on how late you file. While filing Form 8809 can grant you an extension, all contractors should receive their 1099-NEC forms by January 31. You are required to file all forms by this date.

What is the deadline for submitting the 1099-MISC?

The deadline for submitting the 1099-MISC to the IRS is by March 1 if filing by paper or March 31 if filing electronically. The organization must send the former to the payee by February 1. If the due date falls on a weekend, then business must file the form by the next business day.

What is the difference between a 1099-NEC and W-2 form?

More companies are hiring contractors for work that was traditionally performed by full-time employees, which has led to some confusion as to the difference between 1099-NEC and W-2 forms.

Strictly speaking, 1099-NEC is not for reporting full-time employee compensation, though contractors may work full-time hours, participate in the company Slack, and share overlapping responsibilities with employees who are on payroll. Those who receive 1099-NEC must also pay self-employment taxes on their earnings.

Businesses issue 1099-NEC forms for people they hire on to complete a short-term project. Most businesses hire contractors for their expertise in a specific area.

For employees receiving wages and tips, businesses must issue a W-2 form. Full-time employees usually receive benefits such as healthcare and 401k, participate in company-wide meetings, and spend longer periods of time with a business. With full-time employees, the onboarding and offboarding process is more complex.

However, many businesses misclassify full-time employees as contractors to avoid paying for additional benefits. Avoid penalties by ensuring that all employees are classified correctly.

Can you receive both a W2 and a 1099-NEC from the same employer?

Sometimes employees begin working with an employee on a freelance or contract basis, and later transition into a full-time role with benefits. In these cases, it’s possible for employees to receive both a W2 and a 1099-NEC in the same tax year.

Can you receive both a 1099-NEC and a 1099-MISC from the same business?

In rare instances, businesses might need to file both a 1099-MISC and 1099-NEC for one individual. A freelance writer, for instance, could receive royalties and freelance writing money from the same publishing house.

Does your state require 1099 forms?

You will always need to file your 1099 form with the federal government to complete your federal income tax returns. However, income tax laws vary from state to state. You may not need to file those forms with the state if you live in one of the following:

• Alaska

• Florida

• Illinois

• Nevada

• New Hampshire

• New York

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming

How do I file a 1099-NEC form for my business?

You can file the 1099-NEC form electronically by using the IRS’s FIRE (Filing Information Returns Electronically) System. You can also submit your paperwork via mail, which means you need to complete Form 1096 as well.

Why companies choose Via

Many businesses want to hire and onboard employees across borders, but are unsure of how to navigate the complex tax and accounting system. Via’s EOR service makes hiring international talent easy. With our-easy-to-use platform, Via manages the local human resources processes for global employment such as work visas and permits, international contractor payments, benefits, payroll, background checks, and more. Our team of local labor lawyers and on-the-ground experts ensure that your company remains compliant while expanding abroad. As your employer-or-record/entity, Via assumes responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.

With Via’s transparent pricing, you can pay full-time employees or contractors across borders with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace. You can get started in 1-2 business days. That’s why a lot of businesses partner with an EOR service like Via. We expedite the process of hiring and recruiting, setting up HR, and adhering to all employment laws in other countries.

Learn more about our Employer of Record services.