Forms 1099-NEC vs 1099-MISC: Differences explained

When it comes to paying independent contractors, freelancers, or anyone who isn’t on your regular payroll, the IRS has specific reporting requirements.

Two forms, the 1099-NEC vs 1099-MISC, are critical for capturing these payments. But they serve different purposes, and using the wrong one can lead to costly penalties or unnecessary complications during tax season.

Understanding the difference between the two can save you a lot of hassle and keep you on good terms with the IRS.

What is Form 1099-NEC?

Businesses use Form 1099-NEC, titled ‘Nonemployee Compensation’, to detail payments made to independent workers for their services.

These are individuals who are not on your payroll but provide services for your business.

This form became the primary way to report this type of income starting with the 2020 tax year. The IRS brought back the 1099-NEC to lessen the confusion caused by the previous single Form 1099-MISC.

If you paid a freelancer, consultant, or other self-employed individual $600 or more for their services during the year, you will likely need to file Form 1099-NEC.

Ultimately, this document helps the IRS track income paid to those who are not employees.

What is Form 1099-MISC?

Form 1099-MISC, Miscellaneous Information, now covers several other types of payments. These include rent, royalties, and other income that doesn’t fall under nonemployee compensation.

Before 2020, this form was also used to report nonemployee compensation. Now, its use is more specific. For instance, if you paid $10 or more in royalties, you would generally use Form 1099-MISC.

You would also use it for prizes and awards, as well as payments for crop insurance proceeds. The IRS provides specific categories in the instructions for Form 1099-MISC to guide businesses on its proper use.

What are the differences between 1099-NEC vs 1099-MISC?

The main difference lies in the type of payment being reported. Form 1099-NEC is specifically for reporting nonemployee compensation.

This is payment for services performed by someone who is not your employee. Think of freelance writers, graphic designers, or independent IT consultants.

Form 1099-MISC covers various other types of income. This includes:

• Rent payments (reported in box 1)
• Royalties (reported in box 2)
• Prizes and awards (reported in box 3)
• Federal income tax withheld (reported in box 4)
• Fishing boat proceeds (reported in box 5)
• Medical and health care payments (reported in box 6)
• Direct sales of $5,000 or more of consumer products (reported in box 7)
• Substitute payments in lieu of dividends or interest (reported in box 8)
• Crop insurance proceeds (reported in box 9)
• Gross proceeds to an attorney (reported in box 10)

The separation of nonemployee compensation onto its own form, the 1099-NEC, simplifies the reporting process. It makes it clearer which form to use for payments to independent contractors versus other miscellaneous income.

1099-NEC vs 1099-MISC: Who needs to file them?

Businesses generally need to file Form 1099-NEC if they paid $600 or more to a nonemployee for services. This applies to sole proprietors, partnerships, corporations, and other business entities.

You do not typically need to send this form if you paid a corporation (there are some exceptions, such as payments to attorneys).

You generally need to file Form 1099-MISC if you paid $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest.

You also file it for payments of $600 or more for other types of miscellaneous income listed earlier, such as rent or prizes.

Thomson Reuters shared that in 2022, companies filed over 72.3 million 1099-NEC forms. This highlights the significant number of independent contractors in the U.S. economy.

The number of 1099-MISC filings for non-NEC income is also substantial (43.8 million), reflecting the wide range of payments it covers.

How to file 1099-NEC vs 1099-MISC forms

You must provide copies of these forms to both the recipient and the IRS.

Typically, you need to send the recipient their copy by January 31st of the year following the payment. The deadline for filing with the IRS is also generally January 31st if you are filing electronically.

If you file paper forms, the deadline might be later. However, electronic filing is often encouraged and can have different deadlines. It’s always best to check the latest IRS instructions for the specific deadlines each year.

You can obtain these forms from the IRS website or through tax software. When filling out the forms, you will need the recipient’s taxpayer identification number (TIN), such as their Social Security Number (SSN) or Employer Identification Number (EIN).

Many businesses now use accounting software or payroll services to streamline the process of creating and filing these forms.

Penalties for missed deadlines for forms 1099-NEC vs 1099-MISC

The IRS imposes penalties for failing to file information returns correctly and on time. If you miss the filing deadline, the penalty you incur will depend on the lateness of your submission.

For 2024, if you file within 30 days of the deadline, the penalty is $60 per return. If you file more than 30 days late but before August 1, the penalty is around $130 per return.

If you file after August 1 or not at all, the penalty is $330 per return. These penalties can add up quickly, especially for businesses that issue many 1099 forms.

There are also penalties for intentionally disregarding the filing requirements. These penalties are significantly higher. To avoid these costs, it is crucial to understand your obligations and adhere to the IRS deadlines for both Form 1099-NEC vs 1099-MISC.

Staying organized with your payments throughout the year can make this process much smoother.