In 2020 the IRS changed the types and format of Form 1099. Before 2020, non-employee compensation was reported on box 7 of Form 1099 Misc. When the change took effect, box 7 was changed to a single question and non-employee compensation received its own 1099. In this post, we will explain the different situations in which each 1099 may be used. It will not be a complete list, but it will give some context to the usage of the different forms.
Form 1099-NEC is used when reporting payments made to a freelance or contract worker who is not an employee of the company. Form 1099 does not need to be filed for every contractor, only the ones that were paid $600 or more during the year. Form 1099 also is not needed if the contractor is arranged as a corporation. Since the person is not an employee, the organization does not withhold any taxes from their pay. The form should be filed with the IRS and sent to the individual by January 31st.
To fill out the form the organization should have a copy of the contractor's W-9, it is a good practice to acquire a W-9 as soon as the contractor is hired. From there all that needs to be entered on the 1099 is the contractor's name, address, social security number (or EIN), and the amount paid to the individual. If for some reason tax was withheld, which would not be normal, then it would also be reported on the 1099.
Form 1099-MISC is used for a larger variety of situations than 1099-NEC. Form 1099-MISC must be filed and sent to any entity that was paid $600 or more by January 31st of the following year. Some of the common situations that would require a 1099-MISC are rent, royalties, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, payments to an attorney, and other unusual circumstances.
To fill out the form the organization will need to acquire a Form W-9 from the entity or have them provide their EIN/SSN, address, and full name. This information must be reported on the respective boxes on the 1099, reporting the income in the appropriate box. After that, file the form and send a copy to the individual or business. It is an easy process as long as the necessary information has been collected. The best practice is to collect the information throughout the year so that at year-end all that needs to be done is determine which individuals/entities received more than $600.