Forms 1099 MISC vs. 1099 NEC: What’s the difference?

If you’ve been working with independent contractors for four or more years, you’re likely familiar with Form 1099 MISC, the tax form you send in to report payments made to non-employees every year.

A few years ago, the Internal Revenue Service added Form 1099 NEC to the list of tax paperwork it requires from businesses that hire contractors, freelancers, and other self-employed individuals, making the already confusing process even more complex.

So, what’s the difference between 1099 MISC and 1099 NEC? Who needs to send which form to the IRS? In this article, we’ll answer these questions and more.

What you need to know about Forms 1099 MISC and 1099 NEC

As of 2020, Form 1099 NEC replaced its predecessor, Form 1099 MISC, as the official method for reporting taxable, non-employee compensation to the IRS. The 1099 MISC is still around, but now it’s used for reporting payments your business made on things like attorney’s fees, health care, and rent. 

What exactly is Form 1099 NEC?

“NEC” stands for “non-employee compensation,” and it’s actually been around for a while. It was used before 1982 when the IRS decided to discontinue it in favor of the 1099 MISC, which stands for “miscellaneous information.” 

Why the change? In 2015, the Obama administration passed a law called the PATH Act, which stands for “Protecting Americans from Tax Hikes.” The PATH Act offered some new tax credits to individuals and families, and implemented measures to prevent fraudulent claims to said credits. In response, the Internal Revenue Service decided to revive the 1099 NEC to streamline some administrative tasks on their end, officially putting those changes into effect in 2020.

Who needs to file the 1099 NEC?

You need to file this form if your company made payments to people you did business with who meet the following four criteria:

• They are self-employed, i.e. a freelancer, vendor, consultant, or contractor for your company. If you asked them to send you their W-9 when you hired them, they likely fall under the “self-employed” category.
• They provided professional, paid business services to your organization.
• They received $600 or more as compensation for their work during the year.
• You made non-employee compensation payments to an individual, estate, partnership, or, in some instances, a corporation.

Important note: The IRS’s $600 or more requirement applies to each independent contractor individually. So, let’s say you hire three freelance writers. You need to fill out 1099 NECs for each of them once they each reach the $600+ threshold. You cannot fill out one 1099 NEC for all of them if they exceed that threshold.

One more thing to note: The income you include on the 1099 NEC is likely subject to self-employment taxes, which the contractor will take care of themselves through estimated taxes and on their annual tax return. If you’re just getting started or need more guidance, check out Rippling’s simple guide to doing payroll for small businesses.

Here’s where it gets a little more complex. The IRS considers several different types of payment  to be “non-employee compensation,” which is important for you to be aware of when you fill out Form 1099 NEC each year. Here’s what should be reported:

• Fees
• Commissions for work
• Benefits you paid for
• Any bonuses you gave to the non-employee for work they did for you
• Anything else that would count as compensation for the services your company received

Here are a few examples of what belongs on the 1099 NEC for clarity:

• Money you paid to independent contractors, such as freelance writers and graphic designers, or DoorDash drivers
• Referral fees you paid to another professional
• The fees lawyers pay to the experts who they hire during investigations or trials

All of this information belongs in Box 1 of Form 1099 NEC—don’t worry, we’ll go over exactly how to fill out the form later in this article. 

One additional note: If you’re not sure whether someone you’ve worked with counts as an independent contractor or an employee, don’t just guess. Instead, reach out to the IRS and fill out Form SS-8. They’ll help you determine the right thing to do, and you’ll avoid the headaches that come from employee misclassification. 

Do I need to fill out Form 1099 NEC for international contractors?

With the proliferation of US companies hiring international contractors, being aware of your tax responsibilities is more crucial than ever. Fortunately, the answer is pretty straightforward: If your international contractor works for your US company and does so while they are based in a foreign country, no 1099 NEC is necessary. However, if they are performing work for you while living in the United States, you will need to fill out and submit a 1099 NEC for them. 

Paying international contractors and filling out the correct tax forms can be tricky, but Rippling makes things easier by helping you with everything from identifying and sending the right tax forms to keeping track of the workers’ rates and the amount of time they spend working for you, all in one comprehensive, simple-to-use platform.

When do you need to file Forms 1099 MISC and 1099 NEC by?

The filing deadlines for each of these forms are different and the IRS is extremely specific about when each of them needs to be in.

• 1099 NEC Deadline: You need to submit this form to the IRS by January 31st each year, whether you’re sending it by paper or electronically. Unless you can prove some sort of hardship or rare exception to the rule, there are no extensions. This is a hard deadline you shouldn’t miss.
• 1099 MISC Deadline: According to the IRS, if you file 1099 MISC forms on paper, the deadline is February 28th. If you’ll be sending in your 1099 MISC forms electronically, the deadline is March 31st.

What happens if I miss these deadlines or make some other mistake?

The IRS is well known for imposing penalties on taxpayers who miss form submission deadlines, don’t pay on time, or make other mistakes so you must be aware of these.

1099 NEC penalties vs. 1099 MISC penalties

Penalties are never good news, but the fines for basic, common errors are the same for both forms. Here are some frequently made mistakes and their consequences:

• Missing the deadline: The amount the Internal Revenue Service charges if you miss the tax filing deadline depends on how much time has passed. In 2023, it can be anywhere from $50 to $290. This amount is per form; it is not just a total for all forms you sent in late. If the agency determines that you knew about the deadline and ignored it, the penalty goes up. Businesses that find themselves in hot water will pay a minimum of $570 per return. Alternatively, the agency could choose to charge you 10% of the reported income and there’s no cap on this percentage.
• Failing to report the full amount of income: It's crucial to make sure you keep careful, detailed records of all the income paid to your contractors so you don't erroneously report their wages. If the IRS catches errors, you'll find yourself paying an additional 20% of the underreported income, which can get very expensive very quickly.

If you make a mistake, it’s best to fix it immediately, even if you’ve already sent it to the client. Let them know there’s been an error and that you’ll be sending both them and the IRS a new form, and ask them to disregard the current one until the right information has been included. Sometimes the client notices the error and alerts the company, this situation should be taken seriously and handled the same way. The Internal Revenue Service comes down hard on businesses they believe have willfully ignored their requirements, but they are sometimes willing to waive penalties if the taxpayer acts in good faith.

• If you commit a Type 1 error (incorrect amount, code, name, address, or you’ve filed a form that you shouldn’t have filed): File the correct form and check the “corrected” box on the form. 
• If you commit a Type 2 error (wrong payer information, wrong recipient information, or you’ve prepared the wrong type of form): You’ll need to file two forms. File the first 1099 with the same payer and recipient information, but make the amounts zeroes and check the “corrected” box. You should also file a new 1099 form with the appropriate information. 

A simple step-by-step guide to filling out Form 1099 NEC

Here’s how to fill out Form 1099 NEC:

• Step 1: Enter your federal employee ID tax number and your business’s name and address in the correct boxes, which are clearly marked.
• Step 2: Fill out the independent contractor’s information, including their SSN, federal tax ID number, and/or employee ID number. Also, make sure you have their current mailing address.
• Step 3: Box 1 is for the total amount of money you paid to the independent contractor that year.
• Step 4: Usually Box 4 can be left blank since it records the amount you withheld from their paycheck. There’s one exception: If the individual is subject to backup withholding, that amount will go here. There’s no need to guess if this applies to the independent contractor–the IRS is pretty good about altering companies if they need to fill Box 4 out for a particular individual.
• Step 5: Boxes 5, 6, and 7 are for information the state’s taxation department requires, not the IRS. It’s pretty basic: You’ll enter the income the independent contractor received, whether you withheld any state taxes from their paychecks, and which state the report is being sent to. There’s one caveat to this: If you need to report this information to multiple states, you’ll need to fill out a separate form for each one. 

You can find the current version of Form 1099 NEC on the IRS website.

Rippling makes complying with all payroll and tax filings easy. At the end of the year, we’ll automatically generate and distribute 1099 tax forms to your contractors. All current and past 1099 forms remain stored on our comprehensive platform. To learn more, request a demo with Rippling today. 

What happens if I miss these deadlines or make some other mistake?

The IRS is well known for imposing penalties on taxpayers who miss form submission deadlines, don’t pay on time, or make other mistakes so you must be aware of these.

Paying international contractors and filling out the correct tax forms can be tricky, but Rippling makes things easier by helping you with everything from identifying and sending the right tax forms to keeping track of the workers’ rates and the amount of time they spend working for you, all in one comprehensive, simple-to-use platform.

Do I need to fill out Form 1099 NEC for international contractors?

With the proliferation of US companies hiring international contractors, being aware of your tax responsibilities is more crucial than ever. Fortunately, the answer is pretty straightforward: If your international contractor works for your US company and does so while they are based in a foreign country, no 1099 NEC is necessary. However, if they are performing work for you while living in the United States, you will need to fill out and submit a 1099 NEC for them.