The IRS reintroduced Form 1099-NEC in the 2020 tax year. NEC stands for "non-employee compensation." Form 1099-NEC is the equivalent of a W-2 for independent contractors, freelancers or other self-employed individuals who do not fit the definition of "employee." In previous tax years, Form 1099-MISC was supplied to non-employees instead.
Form 1099-NEC vs. Other Forms
The main difference between Form 1099-NEC, Form 1099-MISC and a W-2 is in who receives each one. Prior to the 2020 tax year, employee payments were reported on Form W-2, and many other payments – including those made to independent contractors – were reported on Form 1099-MISC. Now, employees still receive Form W-2, but non-employees receive Form 1099-NEC.
Non-employees are considered self-employed individuals. Payments made to non-self-employed people earning a sporadic income from a hobby-related activity should report that income on the "Other Income" line on Schedule 1 (Form 1040).
Before completing Form 1099-MISC, check that your payments do not need to be listed on another 1099 form. Visit IRS.gov to view a complete list of all 1099 forms and instructions.
Definition of an Employee
It's important to determine whether you've hired an "employee" or a "non-employee" because you're responsible for withholding taxes for employees but not for non-employees. You'll also need to know the difference in order to fill out the correct form.
The IRS distinguishes between employees and independent contractors based on the employer-worker relationship or how the employer controls the worker's behavior or financial assets. Simply writing a contract defining a worker as an independent contractor does not suffice. If the IRS determines that the contractor qualifies as an employee, you're still responsible for withholding taxes from that individual's pay.
Your workers are considered employees if you provide benefits like health insurance, hired them indefinitely versus for a temporary period or they perform key services that your business cannot survive without. Your workers would also meet the definition of employees if you provide them with training, performance evaluation, equipment and significant oversight. Visit IRS.gov for a full list of qualifying differences between employees and independent contractors.
How to Read Form 1099-NEC
Form 1099-NEC asks for the payer's information, the recipient's information, the total amount of money the payer paid the recipient and the amount of the recipient's earnings withheld by the payer (if any) for income and payroll taxes. The large box in the top-left corner is where the payer's information should be entered: company name, address, city, state, zip code and telephone.
The next two boxes ask for the payer's tax identification number (TIN) – which is your employer identification number, or EIN – and the recipient's TIN, which is their Social Security number (SSN), individual tax identification number (ITIN) or adoption taxpayer identification number (ATIN). If you're concerned about privacy, you are welcome to include only the last four digits of any TIN.
The next series of boxes ask for the recipient's name, street address, city, state and zip code. The "Account Number" box is an optional box you can use for your internal record-filing system. In the second column, write the recipient's total compensation in box 1.
Other Information on Form 1099-NEC
The rest of the boxes on Form 1099-NEC only apply in certain situations. Box 2 specifically asks if more than $5,000 of the total non-employee compensation was for consumer products intended for resale. Check the square if so. If you withheld some of the recipient's compensation because they qualified for backup withholding, fill in box 4 with the amount withheld for federal taxes.
Boxes 5 through 7 are optional according to the IRS. Use them if they are convenient for your record-keeping.
Cathy has been writing about finance since 2014 and has been published on sites like The Nest, Bizfluent, Financial Independence Hub, and Credibly. She takes a particular interest in demystifying personal finance questions, like budgeting, tackling debt, and investing for the future.