1099-MISC vs.1099-NEC: Understanding Tax Form Differences and Deadlines
As businesses are scaling down and resizing following the COVID-19 pandemic, the gig economy is exploding as many of us turn to freelance work and independent contracting. In a gig economy, temporary and flexible jobs are commonplace. To reduce and streamline expenses and mitigate time and resource waste, businesses hire more independent contractors and freelancers instead of full-time employees.
The gig economy is well-suited to people with niche skills in key, in-demand fields such as marketing and tech-based work. It’s also ideal for people who need more flexibility in their lives and want to work when they have the time, which is common for app-based delivery driving and similar jobs. People who may have been laid off are also opting to pursue alternative ways to put their skills to use and make ends meet instead of looking for full-time employment roles similar to those they had before. That means more people are ultimately turning to running their own businesses or working as independent contractors.
This kind of work can streamline some aspects of life, but it can also create unfamiliar (and sometimes complicated) financial situations. Come tax season, people who are new to self-employment and side gigs may find themselves confused by the seemingly ambiguous numbers and letter sequences that appear on the new tax forms they’re receiving — and haven’t seen before. Plus, sometimes forms, requirements and processes change, and it’s important to stay on top of these shifts to avoid substantial penalties.
One of the financial forms an independent contractor is likely to encounter during tax season is form 1099-NEC. It’s different from the 1099-MISC, which experienced gig workers may already be familiar with. To better understand the changes in what you may need to file, learn more about the new form 1099-NEC.
What Is Form 1099-NEC?
After a decades-long absence, and amid the rise of the gig economy, the IRS reintroduced a new form solely for reporting independent contractor income. It’s called form 1099-NEC, with “NEC” standing for “Nonemployee Compensation.” Originally effective in 1982 and reinstated in 2020, Form 1099-NEC is the exclusive form businesses must use to report and file payments made to independent contractors. An independent contractor is a service provider who receives “non-employee compensation” from a company. These workers include independent contractors, freelancers, gig workers and self-employed individuals. Their pay is referred to “non-employee compensation” because these workers are classified as independent contractors and aren’t officially employed at a company through traditional employment channels.
When a business hires a non-employee independent contractor to produce work amounting to $600 or greater, they are required to file a 1099-NEC form with the IRS. Businesses will no longer report payments to independent contractors on Form 1099-MISC now that the 1099-NEC is in use. Essentially, the 1099-NEC was reinstated to separate out income earned from independent contracting and other forms of miscellaneous income. This can make it easier to keep track of income earned from freelancing or gig work.
The filer, which is the client or company that contracted the gig worker, receives two copies of the form containing the same information, referred to as Copy A and Copy B. Copy A goes to the IRS, and Copy B is sent to the independent contractor for their records. Copy A of Form 1099-NEC must be sent to the IRS by the end of January each year, which can be done either electronically via e-filing or via mail. As of 2020, this deadline was accelerated from the previous deadline of the end of February each year.
How Is 1099-MISC Different From 1099-NEC?
The IRS reintroduced Form 1099-NEC to keep non-employee expenses separate from the various expenses that remain reported on Form 1099-MISC. The form also helps alleviate some confusion and filing deadline issues between 1099 and W-2 forms. For example, in 2015, the filing deadline for Form 1099 was the end of February (paper) or the end of March (electronic). Meanwhile, Form W-2 (for employee compensation), was due by the end of January. This resulted in some people getting tax refunds on their employee compensation filing before they filed details about their non-employee compensation.
Although the 1099-NEC is positioned to streamline the process for independent contractors, the original filing form, Form 1099-MISC, is also still in use. The purpose of form 1099-MISC is in the name: It tracks miscellaneous payments. In 2020 and beyond, the form is used solely to report miscellaneous sources of income, such as rent or money earned through a prize or award.
The 1099-MISC form must be mailed to recipients by February 1 and filed with the IRS by March. The exact due date in March depends on whether it is being filed electronically or via mail (print).
What Is Reported on Form 1099-NEC?
Freelancers and contractors generally file taxes using a Schedule C to determine and report their taxable income. Their copies of 1099-NEC forms are for their records to track and document income they earned from each of their clients.
If you’re an independent contractor who receives a 1099-NEC, it’s important to understand the information it includes and the ways you’ll use those details when filing your taxes. In looking at the form, you’ll notice that several of the boxes include details about your personal information, such as your name, address and Taxpayer Identification Number (TIN), which may be your Social Security number or one of these alternatives. The form also includes similar information about the client you earned money from, such as their address and TIN. You’ll find the amount of money you earned — which you’ll need to report on your Schedule C form when you file taxes — in Box 1 on the form.
While contracted work requires a 1099-NEC filing, employee income reporting is done through form W-2. It’s important to know the difference, as there are sizable penalties for misclassifying employees as independent contractors when you’re running a business.
Who Files a 1099-MISC?
In the eyes of the federal government, you are engaged in business if you operate for a profit. Businesses must file Form 1099-MISC annually for each person who was paid at least $10 in royalties or at least $600 in:
- Rents
- Prizes and awards
- Other income payments
- Generally, the cash paid from a notional principal contract to an individual, partnership or estate
- Any fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney
- Section 409A deferrals
- Nonqualified deferred compensation
Businesses must also file Form 1099-MISC for each person who had withheld any federal income tax, regardless of the total payment amount. Payments by federal, state or local government agencies are also reportable.
As of 2020, do not use Form 1099-MISC to report payments to independent contractors, and do not use it to report employee compensation if you run a business. Some organizations may need to file both a 1099-NEC and a 1099-MISC. If this is the case, you can use Form 1096 for filing both forms. You can find more details on the IRS website or by consulting with a tax professional.
