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The 1099 federal income tax information form is an important means of reporting nonemployment income to the Internal Revenue Service (IRS). There are currently 20 varieties of 1099 forms corresponding with different types of income. Up until recently, employers used the 1099-MISC form to report payments to contingent workers — that is, freelancers and independent contractors.
However, that has changed with the reintroduction of Form 1099-NEC. In this post, we’ll unpack in more detail how to report nonemployee compensation with a 1099 form and explain the difference between the new Form 1099-NEC and Form 1099-MISC.
What is Form 1099-NEC?
The NEC in Form 1099-NEC stands for nonemployee compensation. From a company’s perspective, nonemployee compensation constitutes any remuneration you pay to a worker who you classify as an independent contractor rather than as an employee. Specifically, companies must provide contract workers with a 1099-NEC form if they paid them US$600 or more for their services in a given tax year.
From a worker’s perspective, nonemployee compensation, also referred to as self-employment income, is any payment received for work provided as a freelancer or independent contractor rather than as an employee. Employee income is reported on Form W-2. Some workers who are employees of a company and who do some freelancing on the side will receive both W-2 and 1099-NEC forms. Individuals must report all of their income, no matter the source, when they file their taxes.
Why is Form 1099-NEC Returning?
Some contractors and employers may remember Form 1099-NEC. This form has been out of use since 1982. Since then, businesses have used box 7 on Form 1099-MISC to report nonemployee compensation. So, why did the IRS reintroduce Form 1099-NEC this year? There are two main reasons for this change.
1. The rise of the gig economy
Freelance work has become increasingly common, with more and more professionals in the U.S. doing this type of work each year. Some workers engage in freelance work on the side in addition to holding a more traditional position as an employee, while others are completely self-employed. Nonemployee work can vary widely from casual, unskilled labor to consulting services from an expert.
Growth projections suggest that, by 2027, just over half of U.S. workers will be freelancing. The expanded prevalence of companies paying, and workers receiving, nonemployee compensation called for a form dedicated to this type of income rather than just a box on a miscellaneous form.
2. Filing deadline simplification
Another key reason for this change was to avoid the previous confusion caused by separate filing deadlines for reporting employee and nonemployee compensation. Employers are required to file Form W-2 for employee compensation from the previous year by Jan. 31 annually. However, the deadline for filing Form 1099-MISC was two months later. This large gap caused confusion and left some room for tax fraud.
In 2015, the IRS attempted to solve the problem with the Protecting Americans From Tax Hikes (PATH) Act. This legislation aligned the deadline for reporting nonemployee income in box 7 of Form 1099-MISC with the deadline for Form W-2, but left the later deadline for other parts of Form 1099-MISC. Rather than solving the problem, this still perplexed many filers because they had two different deadlines for parts of the same form.
Reintroducing Form 1099-NEC is the most recent solution. Form 1099-NEC has a single filing deadline, and that deadline aligns with Form W-2. So now, employee and nonemployee income share the same reporting deadline, and they each get their own tax form.
What is the difference between 1099-NEC and 1099-MISC? Both Form 1099-NEC and Form 1099-MISC are used to report income to the IRS. However, they differ in the types of income they cover:
- Nonemployee compensation: Form 1099-NEC is the new form used to report nonemployee compensation. If a company pays workers for their services and the workers are not W-2 employees, then the company would use Form 1099-NEC. This form is entirely dedicated to reporting payments to contingent workers.
- Miscellaneous income: Form 1099-MISC serves as a catch-all for miscellaneous forms of income that do not fit other tax forms. This used to include nonemployee compensation, which was listed in box 7 of the form. Now, companies will no longer use Form 1099-MISC to report nonemployee compensation. Form 1099-MISC, which is now titled Miscellaneous Information, will continue to be used for miscellaneous forms of income, but box 7 is now dedicated to reporting direct sales of at least US$5,000.
Form 1099-NEC and 1099-MISC share the fact that, at various times, they have each been used to report nonemployee compensation. However, at the moment, the only thing they have in common is that they both belong to the 1099 category of tax forms, used to report nonemployment income. Within this category, Form 1099-NEC and Form 1099-MISC are used to report entirely different types of income.
Who should file Form 1099-NEC?
If your company paid a nonemployee US$600 or more within a given tax year for services to your business, then you must file a 1099-NEC form. Note that this does not apply to international contractors based outside of the U.S.
According to the IRS, payments to nonresident aliens should be reported on Form 1042-S, Foreign Persons’ U.S. Source Income Subject to Withholding. As you would file Form 1096 along with Form 1099, in this case, you would file Form 1042 along with Form 1042-S.
When it comes to U.S. workers, Form 1099-NEC applies whenever you’re paying a nonemployee. Nonemployees can be anyone you hired on a contract basis to complete a project for your company. This could include, for example, a freelance writer who works regularly for your company or an expert who came in to consult on a specific project. It could also be an attorney whose services you engaged. If the worker is not on your regular payroll, then the individual is not your employee and should receive a Form 1099-NEC rather than a W-2 form.
In some cases, rather than hiring an individual contractor, you may have contracted a corporation, estate, or partnership to complete work for your company. In these cases, you can still use a 1099-NEC form to report those payments. Note that nonemployee compensation does not always take the form of direct payment for a service. Nonemployee income could also include fees, benefits, or commissions.
Any self-employed workers who contracted their services and received at least US$600 from a client should receive a 1099-NEC form. They must report this income when they file their income taxes.
Who should file Form 1099-MISC?
Form 1099-NEC only replaced box 7 on Form 1099-MISC, so there are still plenty of instances when you might file this miscellaneous income form. However, if you’re wondering if you can use 1099-MISC instead of 1099-NEC, the answer is no. You can only use 1099-MISC to report other types of nonemployment income. Some examples of income that would necessitate filing Form 1099-MISC include:
- Rent payments
- Prizes or awards
- Fishing boat proceeds
- Crop insurance proceeds
- Medical or healthcare payments
- Gross proceeds paid to attorneys
- Substitute dividends and tax-exempt interest payments
As with Form 1099-NEC, US$600 is the cutoff that necessitates reporting income on this form, with the exception of royalty payments. Any royalties of US$10 or more should be reported on Form 1099-MISC. The IRS provides detailed information on what types of income should be included in Form 1099-MISC. If there is not another tax form dedicated to the type of payments you need to report, then Form 1099-MISC should be the form you use.
If you employed a contingent worker and need to file Form 1099-NEC, you will need to include the following information in the form:
- Your company’s identifying information: Include your company’s legal name and address along with your taxpayer identification number (TIN).
- The recipient’s identifying information: Also include the recipient’s name, address, and TIN or Social Security number.
- Compensation amount: In box 1, list the total amount of nonemployee compensation you paid to the recipient in the previous tax year.
- Withholdings information: If applicable, note any federal income tax or state income tax withholdings.
The form also gives you a space for reporting state income earned and providing your company’s state tax identification number. You don’t need to report this information to the IRS, but you can include it on the form as a courtesy to recipients since it makes it easier for them to file their state income tax return.
The IRS encourages businesses to file Form 1099-NEC electronically using the Filing Information Returns Electronically (FIRE) system. If you’re filing 250 or more information returns in the same year, then you are legally required to file electronically. Filing electronically involves creating the file electronically from the start — you cannot scan a PDF copy, for example.
Filing a 1099-NEC form should involve sharing the form with all relevant parties:
- IRS: First and foremost, Copy A of Form 1099-NEC should go to the IRS. Along with Form 1099-NEC, you will also submit Form 1096, Annual Summary and Transmittal of U.S. Information Returns, which reports the total dollar amount of all contractor payments.
- State department of revenue: Some state tax departments require that you send them a copy of the form, as well. Check your state’s requirements to see if this step is necessary. If so, you will submit Copy 1.
- The contractor: Contractors should also receive a copy of the form — Copy B — so they can use it to file their income taxes. Copy 2 provides contractors with their state filing information.
- Your records: Finally, you should keep Copy C for your company’s records. You will need this information on wage expenses to file your business tax return.
The IRS will compare the information you provided with the contractor’s tax return, so it’s crucial that you report payments accurately.
Do businesses have to file both 1099-MISC and 1099-NEC?
Some businesses will have to file both Form 1099-MISC and Form 1099-NEC — in some cases, for the same worker, though this situation would be uncommon.
The forms you must file depend on the type of payments your company needs to report to the IRS. For example, if your company employs contractors and hosted a contest or a drawing with monetary prizes, you would likely need to file both forms to report these different types of payments. If you do need to file both types of 1099 forms, you must file a separate Form 1096 for each form type.
In many cases, companies that used to file Form 1099-MISC to report payments to contractors will now simply switch over to Form 1099-NEC. There is no longer any need to use Form 1099-MISC to report nonemployee compensation — this form is only relevant to your company if you need to report a miscellaneous type of payment included in this form.
What are the filing deadlines for Form 1099-NEC and 1099-MISC?
When filing Form 1099-MISC or 1099-NEC, be sure to submit before the deadlines, which are as follows:
- Form 1099-NEC deadline: Form 1099-NEC is due by Jan. 31 of the year following the tax year covered by the form. This deadline is the same for paper or electronic filing. When Jan. 31 falls on a weekend or holiday, the deadline is moved to the following business day. In 2021, for example, this made the actual deadline Monday, Feb. 1. Companies must submit the form to the IRS and to contractors by this time.
- Form 1099-MISC deadline: The deadline for filing Form 1099-MISC with the IRS is March 1 if you file on paper or March 31 if you file electronically. However, companies must send Form 1099-MISC to recipients no later than Jan. 31 — or a bit later in the case of a weekend or holiday.
Failing to issue forms by these deadlines can result in penalties from the IRS, anywhere from US$50 to US$270 per form up to a maximum of US$556,500 within the same year. The penalty amount will depend on how late the form is, though you can incur even more serious fines of at least US$550 per form if the failure to report is not accidental but a deliberate disregard of the requirement.
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THIS INFORMATION IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Globalization Partners does not provide legal or tax advice and the information is not tailored to the specific situations of your company or your workforce. Globalization Partners makes no representations or warranties concerning the accuracy, completeness or timeliness of this information. Globalization Partners shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.