What are the main differences between Form 1099-MISC and Form 1099-NEC?
Form 1099-MISC (Miscellaneous Income)
Form 1099-MISC is used by businesses to report miscellaneous payments made to contractors or individuals, such as:
- Royalties or broker payments of $10 or more
- Payments of $600 or more for:
- Rents
- Prizes and awards
- Other Income
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish from a business
- Payments to attorneys
- Fishing boat proceeds.
Businesses or individuals who qualify for Form-1099 MISC must fill out the form after the tax year ends to report their payments to the IRS.
Scenario: Patricia owns a rental property and received $1600 from her insurance company for crop damage. She will receive Form 1099-MISC from the insurance company and use it to report this income when she files her taxes.
Form 1099-NEC (Non-Employee Compensation)
Form 1099-NEC is used to report payments made to non-employees, such as freelancers and contractors. It was re-introduced in 2020, and replaced Form 1099-MISC for this purpose. If your business pays over $600 to an individual or a business for contract work, your business must file this form.
To meet the criteria for non-employee compensation:
- The payment should be made to someone who is not your employee.
- The payment should be for services related to your business.
- The payment can be made to an individual, partnership, estate, or sometimes even a corporation.
Scenario: Patricia, a freelancer, completed a $4000 project for Zylker Inc. in February. Zylker Inc. paid her directly as a contractor and issued a Form-1099 NEC to report the $4000 payment to both Patricia and the IRS. She will now use this form to report her freelance income when she files her taxes.
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