Which Form to Use: 1099-MISC or 1099-NEC?

The Internal Revenue Service (IRS) has a myriad of forms, and it can get confusing. The IRS will sometimes put a form on hold and use another. That was the case with Form 1099-NEC. It was not used for over 35 years, and business owners used Form 1099-MISC whenever they had to report any non-employee compensation. That is changing. Form 1099-NEC has been changed, and for the 2020 tax year, it, and not 1099-MISC, will be used whenever non-employee compensation must be reported.

Form 1099-MISC. A Quick Review

Form 1099-MISC is the most popular information returns form, and it is used to report payments to independent contractors for royalties, rent, among other payments. Anytime a business pays $600 or more, they need to file this form, when the payment is for any one of the following reasons:

Rent

Proceeds from a fishing boat

Royalties

Substitute payments made instead of paying interest or dividends

Payments for medical and healthcare

Proceeds from crop insurance

Gross proceeds paid to a lawyer

Any excess golden parachute payments

 

Find out more about Form 1099-MISC.

Form 1099-NEC

Form 1099-NEC, starting in 2020, will be used for reporting non-employee compensation. So instead of using 1099-MISC to report non-employee compensation, you will use 1099-NEC. Also, note that form 1099-MISC will continue to be used for reporting other payments to contractors or vendors.

The 1099-NEC has been on the shelf since 1982 but is being revived because of the Protecting Americans from Tax Hikes Act (Path Act).

Prior to the Path Act, taxpayers could file the 1099-MISC for non-employee compensation and miscellaneous income items. The deadline was February 28, but in 2015 the Path Act changed the due date for non-employee compensation to January 31. It meant businesses were forced to separate out any non-employee compensation forms and other payment forms. The chances for confusion and mistakes were fairly significant. The 1099-NEC was reintroduced to separate non-employee expenses and prevent more mistakes.

One noticeable difference resulting from bringing back 1099-NEC is a change in box 7 of 1099-MISC. it will now read, “there may direct sales of $5000 or more of consumer products to a buyer(recipient) for resale.” Any compensation for non-employees will be reported on a 1099-NEC from now on.

What to Report on a 1099-NEC?

You will report the following non-employee compensation on Form 1099-NEC, and that will include these types of payments made to an independent contractor.

Fees

Prizes

Commissions

Awards

Other types of compensation paid for services

 

Find out more about Form 1099-NEC.

If non-employee compensation is paid to an independent contractor, there will be separate non-employee compensation payments from all other 1099-MISC payments. It all starts with the 2020 tax year, and if you have paid any employee $600 or more in non-employee compensation, you will fill out Form 1099-NEC.

Important Note:

The IRS allows us to file the previous three-year forms. But if you have to report non-employee compensation for previous years (2019, 2018, or 2017), you will use Form 1099-MISC. Form 1099-NEC is not available for previous years.

Using a 1099-NEC service provider like eFile360 to file you 1099-NEC is recommended, as it can save you a lot of time and headaches.