When paying taxes, freelancers and contractors must be aware of two forms: 1099-MISC and 1099-NEC. For years, everyone used the 1099-MISC form, which tracks annual income that has yet to be taxed. In 2020, the IRS added form 1099-NEC to the tax catalog; NEC stands for “nonemployee compensation.” And in 2022, the IRS released a continuous-use format version of the 1099-NEC form and added a Foreign Account Tax Compliance Act (FATCA) filing requirement for the 1099-MISC.
We’ll explain the differences between forms 1099-MISC and 1099-NEC and share tips to help small business owners, freelancers and contractors minimize tax mistakes.
Other payroll forms business owners should be aware of include Form 941, Form 944, Form W-2 and Form W-9.
What is a 1099-NEC form?
The 1099-NEC form provides a simplified way to report independent contractor wages. While you can view a sample 1099-NEC on the IRS website, you can’t download the document. Instead, you must order the form or file it online via the Filing Information Returns Electronically (FIRE) system.
The IRS requires businesses to report nonemployee compensation of $600 or more using Form 1099-NEC (not Form 1099-MISC).
Example of 1099-NEC form
Form 1099-NEC. Source: IRS
Who gets a 1099-NEC form?
Self-employed individuals who supply services to a business that exceed $600 of nonemployee compensation may receive a 1099-NEC from the company for which they provided services. In addition, individuals, sole proprietors, partnerships and LLCs may receive a 1099-NEC, as they are not W-2 employees of the business.
What is reported on a 1099-NEC?
A 1099-NEC covers several types of income. The information you fill out on this form includes:
- Prizes and awards (nonemployee-provided services)
- Other forms of compensation (nonemployee-provided services)
What is a 1099-MISC form?
The 1099-MISC form is used if $600 or more in payments (other than nonemployee compensation) was paid to an individual or LLC. Rent, legal fees and prize winnings qualify to be reported on a 1099-MISC.
Example of 1099-MISC form
Form 1099-MISC. Source: IRS
In 2022, the 1099-MISC form received a new box. The number 13 box is the Foreign Account Tax Compliance Act (FATCA) filing requirement checkbox. Since number 13 was added, the old box numbers 13-17 are now renumbered 14-18.
Who gets a 1099-MISC form?
Payees eligible for the 1099-MISC form should complete Form W-9. All payments, including attorneys’ fees, awards, healthcare, royalties and rents, should be reported if they total $600 or more. For a complete list of included payments, visit the IRS website’s 1099-MISC page.
What is reported on a 1099-MISC?
Here’s a closer look at the items a 1099-MISC includes:
- Payments to an attorney: Box 10 includes payments to attorneys, law firms and corporations. Notably, a 1099-NEC should be used for attorneys’ fees, while a 1099-MISC should be utilized for settlements in business lawsuits, etc.
- Other income: Box 3 of the 1099-MISC (“Other income”) can be used for things like awards and prizes, including money and merchandise. The form will be issued when someone wins $600 or more, but this excludes gambling profits.
- Healthcare: Within box 6, report payments your company paid to healthcare providers, healthcare insurance companies, doctors, suppliers, etc. It is not necessary to report payments to pharmacies for prescription drugs.
- Royalties: Royalties totaling $10 or more during a calendar year must be reported in box 2. Royalties include copyrights, patents, oil, gas, etc.
- Rents: Rents should be added to box 1 of the 1099-MISC form. Rents include payments for renting or leasing space for business use (not payments made to real estate agents or property managers). Rents also include machine rentals (any machine operator payments should be reported on a 1099-NEC), pasture rentals and coin-operated amusements.
Payments to corporations are not usually reported. However, if you paid a corporation for medical or healthcare services, you must note all payments.
What are the differences between 1099-MISC and 1099-NEC?
As of 2020, the 1099-NEC form is used for all independent contractor income. The 1099-MISC is still a valid form. However, it is reserved for payments that are not contractor or freelancer wages, such as rent, prizes and awards.
The due dates for the forms are different, as well. For example, the 1099-NEC is due Jan. 31, while the due date for the 1099-MISC is March 1 if filed by paper and March 31 if filed electronically.
Use Form 1099-NEC to report nonemployee compensation. If you must account for third-party payouts like awards, contest prizes, rents and royalties, use Form 1099-MISC.
How do you file a 1099-NEC?
If a business hired a freelancer or contractor and paid $600 or more for services rendered in a calendar year, it must report those earnings by filing Form 1099-NEC.
Form 1099-NEC has two copies:
- Copy A: Copy A should be filed with the IRS.
- Copy B: Copy B should be sent directly to the contractor.
Contractors who receive Copy B of Form 1099-NEC are not required to file the form. However, they should receive a copy of the form for their records; they can request one if necessary. Contractors should report any self-employment income on Schedule C.
Some locations require you to file your 1099-NEC and 1099-MISC forms with your state. The following states are exempt from 1099 filing:
- New Hampshire
- New York
- South Dakota
Some states have additional rules about filing electronically regarding 1099s.
How to fill out a 1099-NEC
Companies that must file a 1099-NEC will first need a W-9 form from the contractor. A W-9 form includes the contractor’s legal name or business name, business entity, current address, and taxpayer identification number. Use the W-9 information to fill out the 1099-NEC, double-check payment totals, and note this information on the form.
Where to send the 1099-NEC
Since the 1099-NEC cannot be downloaded from the IRS website, you must plan ahead to ensure you file on time.
You must send Copy A to the IRS by Jan. 31. You can mail the form or file it electronically:
- Mailing Form 1099-NEC: To receive a paper copy of the 1099-NEC, request one through the IRS website. If you mail the 1099-NEC, you will need Form 1096 as a cover sheet. Fill out both forms and then mail them to the IRS.
- Filing Form 1099-NEC electronically: Filing electronically also requires some prep work. To use the IRS’ FIRE System, you must have compatible software that converts IRS forms into the proper format. No document scanning is accepted. You’ll also need a Transmitter Control Code (TCC). To get a TCC, complete Form 4419 and submit it to the IRS at least 30 days before the 1099-NEC tax deadline. Early submittal of Form 4419 will allow the IRS enough time to provide you with your TCC. Once you receive your TCC, create your account with FIRE.
Copy B can be sent physically or electronically to the freelancer or contractor. However, you must have their consent to send the form electronically. Obtain consent by emailing them. If you aren’t granted permission, you must mail the 1099-NEC to the address you have on file from their W-9.
To follow IRS rules when gathering consent, include the following information for the freelancer:
- Notice that if the contractor does not supply consent for an electronic copy, they will automatically receive a paper copy
- How to withdraw consent (can be completed anytime via email or paper)
- Whether you are asking for consent for the current tax year or for as long as they work for you
- The hardware and software needed to view the form (if being sent electronically)
- Instructions on receiving a paper copy (even if they have already received an electronic one)
- Conditions on when the form will not be sent (for example, when the contract is mutually canceled or the contractor makes less than $600 in the calendar year)
- How to update their information to receive the form successfully
- Conditions on when the electronic form will no longer be available (for example, if the stored form is on a company server for a fixed duration of time)
When to send the 1099-NEC
Copy A (IRS) and Copy B (contractor) of the 1099-NEC must be received by Jan. 31 of the following year. If Jan. 31 does not fall on a business day, forms will be received on the next business day.
What are the benefits of payroll software?
Payroll software can streamline the process of handling payroll forms like the 1099-NEC and 1099-MISC and much more. Here’s how payroll software can help your business:
- Payroll software saves time. Payroll software can eliminate headaches and reduce the time you and your staff spend manually entering payroll details and dealing with payroll taxes.
- Payroll software provides valuable insights. Payroll software generates helpful payroll reports that provide insights into individual and team financial data and tax compliance.
- Payroll software reduces errors. Manually entering payroll details for employees and contractors can be costly. Payroll software minimizes the risk of formulas being tampered with and inaccurate data being entered. Payroll software can even alert you if the numbers aren’t lining up.
- Payroll software increases security and compliance. Manual payroll processes can create unnecessary security issues, no matter your business’s size. Payroll software uses password protection and cybersecurity measures to secure your data. Plus, the best payroll software stays up to date on current compliance requirements, saving you the frustration of tracking tax laws and state and federal regulations.
- Payroll software provides support. Most small business owners aren’t experts on payroll. Although this function can be outsourced, payroll software can eliminate the need for a finance team to oversee your payment processes. Try to choose a payroll provider with 24-hour support. That way, no matter what your issue is, you can quickly talk to an expert to get back on track.
What are the best payroll software options?
The best online payroll service for your business will fit your budget and provide the tools and functionality you need. Consider the following excellent payroll solutions that will suit many small businesses:
- Gusto: This cloud-based, all-in-one payroll solution can handle payroll processing, tax requirements and human resources. In addition, the software offers a combo package for businesses that want to automate accounting processes. Read our review of Gusto to learn more about this platform’s a la carte approach that meets the needs of many small businesses.
- Paychex: Paychex has service options for businesses of all sizes, from sole proprietorships to enterprises. It can handle payroll processing and tax obligations and even create custom payment options for your W-2 employees and seamless solutions for contractors and freelancers. Plus, you can pay your employees with direct deposit, paper checks or prepaid debit cards. Read our Paychex review to find a service plan for your organization.
- OnPay: OnPay integrates with many of the best accounting software solutions, including QuickBooks Online and Xero. The company says its intuitive, mobile-friendly system can save business owners over 15 hours per month. Read our OnPay review to learn how the vendor helps automate payroll and taxes.