Tax requirements for non-employees: a concise guide to 1099-NEC and 1099-MISC

miscellaneous income
  1. Sara is an independent VFX artist. She works on post-production graphics.

Her recent assignment was with Marvel for one of their blockbuster movies.

She was excited about the work, the results, and also the compensation she received!

But now, how does she report her income? She’s not on Marvel’s payroll. She’s not a regular employee. This was just a contractual project.

  1. Marvel, on the other hand, is being sued by one of its actors for a breach of contract.

And this actor is not backing down!

Marvel hires one of the top attorneys in Media and Entertainment Contracts to look into it and advise them on their legal course of action.

What Form does Marvel have to issue to indicate payment for the services rendered by him?

The aforementioned cases come under the umbrella of Form 1099. But there are so many types, so which one? Do they come under the same Form or a different one? Can they be used interchangeably? Let’s dive in.

Here, we will be looking at two types of Form 1099, namely 1099-NEC, and 1099-MISC, and the situations in which they will be applicable.

Prior to 2020, the 1099-NEC was last used in 1982. It was scrapped and 1099-MISC was used to report the Non-Employee Payments. This caused tons of confusion as it led to two different deadlines. One deadline for the self-employed, and a different deadline for the other payees. So now, with the increase in self-employed workers (about 15 million), the IRS decided to bring 1099-NEC back to simplify the process. Presently, reporting of self-employed income as a non-employee reflects exclusively on 1099-NEC.

What is Form 1099-NEC and when is it used?

NEC here indicates “Non-Employee Compensation”. This form was re-introduced in 2020. Since then, all non-employee and self-employment compensation is to be reported via the same.

Non-employees here could be contract workers, gig workers, or self-employed individuals. Businesses need to issue Form 1099-NEC to all the contract workers and gig workers whose services have been used and to whom compensation has been paid. The said compensation includes fees and commissions.

To report the payments in a Form 1099-NEC, the following criteria need to be fulfilled:

  • the payment was made to a non-employee
  • total payment for the year amounts to $600 at least
  • the payment was made for services in the course of the trade or business
  • the payment was made towards an individual, partnership, estate, or corporation

The above-mentioned four conditions have to be met for the payment to be reported on a Form 1099-NEC.

As a business, you will need to issue a 1099-NEC to every contract worker or non-employee to whom you have paid at least $600 over the course of that year. Before you start the filing, it is suggested that you send Form W-9 to each contract worker / non-employee so that you have the right details, like name, address, ITIN, etc. The responsibility and the onus to file 1099-NEC are on you. You will have two copies of the form – Copy A and Copy B. Copy A is the one that has to be sent to the IRS. Copy B has to be sent to the contractor.

If the contractor is registered as an S-corp or a C-corp, then a 1099-NEC is not required.

As a contractor/gig worker, you will receive Copy B of the 1099-NEC from every business that has used your services – one from each and every client that has paid you over $600. There is no requirement for you to send it to the IRS. You must keep it only for your records. You can use the information on it to file your Schedule SE, which is the Self Employment Tax towards your Social Security and Medicare taxes.

This Form is due on the 31st of January of every filing year, regardless of whether it is filed online or on paper (If the due date falls on a public holiday, the next business day will be considered the due date).

What is Form 1099-MISC used for?

MISC here indicates Miscellaneous Income. It is also known as Miscellaneous Information. Payments made and received that are not covered under other Form 1099s (including Form 1099-NEC) are reflected here.

One clear and crucial distinction between 1099-NEC and 1099-MISC is that 1099-MISC will reflect payments that are NOT subject to self-employment taxes.

The similarity between NEC and MISC is that the lower limit of $600 applies here as well.

Form 1099-MISC can be used to report:

  • Rents, like the office space or warehouse you rent for your business
  • Prizes and Awards
  • Medical and Healthcare payments that were made in the course of the business
  • Cash payments for aquatic life, i.e. fishing boat proceeds
  • Crop insurance proceeds
  • Payments to an attorney
  • Other income payments

Royalties that are equal to or more than $10 are also required to be reported in this form.

Since the NEC portion of Form 1099-MISC is removed, the form has undergone some redesigning and it looks different than it did earlier. Please make note of the rearrangement in boxes that have been done in 1099-MISC and fill it with care.

For instance, Box 7 on a 1099-MISC was used for Non-Employment Compensation. Not anymore though. Now, Box 7 is used to report the sale of consumer products that amount to a minimum of $5000.

Just like 1099-NEC, it is the responsibility of the payer to file 1099-MISC and send one copy to the IRS, and the other to the recipient.

Some states like Alabama, Connecticut, and Utah, require Form 1099-MISC to be reported to them as well. So, depending on the location of the business, make sure you do the needful.

The deadline by when the recipient needs to receive his copy is February 1st of the filing year. The IRS needs to receive the form before March 1st if it is done on paper and by March 31st if it is done online.

Some errors and penalties to avoid

As a recipient/contract worker, you may sometimes not receive your copy of 1099-MISC/1099-NEC on time. Do not fret. You may contact your client and cross-check to find out if they have sent it. If they have, then just wait for a few more days. If two forms are sent out for the same service, then the IRS also receives two forms for the same service done by you. The IRS will assume that you did the job twice and hence got paid twice the amount. This means a bigger tax bill for you.

So whether or not you receive your copy on time, the correct amount must be reported by you to the IRS.

As a business, to avoid the above problem, you can send out a consent form to the recipient seeking their permission to send Form 1099 via e-mail. If you delay filing, you will have to face penalties.

  • A penalty of $50 if you file within 30 days
  • A penalty of $100 if you file more than 30 days late, but before August 1 of the filing year
  • A penalty of $260 if you file on or after August 1

An extension on the deadline can be requested by filing Form 8809. Your case might be considered if you were unable to meet your obligations due to reasons beyond your control.

You can also face penalties if you don’t give a copy to everyone who is supposed to receive it, enter the incorrect amounts, or file an incomplete form.

Make sure that you as a payer are differentiating the payment properly and are not interchangeably using NEC and MISC. Check the year and name of the form when you do the filing. The year on the form should correspond to the year in which the payment was made. For example, if the payment was made in 2021, and the filing is being done in 2022, the year on the form should read 2021.

If you made some errors while filing them on paper and spot them after sending them to the IRS, then you should send a corrected form and a Form 1096 to the IRS as soon as possible.

If errors were made while filing electronically, you can still use paper forms to correct them.

Circling back to the two cases mentioned in the beginning, can you deduce which form applies to whom?

In Sara’s case, the form she will receive is Form 1099-NEC from Marvel’s office for rendering her service as a VFX artist. She will receive her Copy B of the form from them whereas they will file Copy A directly with the IRS

In the second case, the attorney’s fees will also be reported on Form 1099-NEC. However, any gross proceeds are reportable on Form 1099-MISC. Gross proceeds in this case are payments from legal settlements.

The forms can again vary if the recipient of a payment is a non-citizen of the US. Since the forms have been separated and will take a little time to get used to, help can be taken from a CFO consulting service.