This summer, the IRS made a change to 1099 miscellaneous income reporting for 2020, reactivating Form 1099-NEC while retaining 1099-MISC. Employers who pay independent contractors $600 or more in 2020 will associate wages with one of the two 1099 forms and will have to make adjustments to prior wages for the year.
What are the differences between the forms?
Last used in the 1980s, Form 1099-NEC will be used for reporting 2020 payments to an independent contractor who is not an employee (NEC stands for nonemployee compensation). For many employers, this will be the primary 1099 form issued at year-end for independent contractor pay.
Form 1099-MISC will be used for reporting certain payments to employees, and for very specific nonemployee payments as outlined by the IRS. An example of an employee who might receive both a W-2 and a 1099-MISC from an employer is a customer service representative who is also a professional artist and is hired to paint a mural on her employer’s office wall during nonwork hours. However, it’s a good idea to consult with your attorney or CPA if you plan to hire a current or former employee as an independent contractor to avoid misclassification and potential IRS penalties.
The IRS has outlined other business payments where a 1099-MISC must be used:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
- At least $600 in:
- Prizes and awards
- Other income payments
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
- Any fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney
- Section 409A deferrals
- Nonqualified deferred compensation
How does this affect my payroll?
If you paid 1099 wages in 2020 through your payroll system, determine which form should be used for each payee at year-end and make the appropriate adjustments to the related prior wages in the system. When you pay independent contractors going forward, assign the payment to the appropriate 1099 pay type before processing payroll. Contact your payroll vendor for information on how to do that within your payroll system.
Where do I go for more information?
The IRS has updated their 1099 instructions, which provide detailed information about both forms. If you are unsure whether one or more 1099 payments should be reported on Form 1099-MISC or Form 1099-NEC, contact your CPA for guidance.
- IRS Tax Tip 2020-80, July 6, 2020: How to report nonemployee compensation and backup withholding
- IRS Instructions for Forms 1099-MISC and 1099-NEC (2020)