How are they Different?
For the tax year 2020, the IRS introduced new forms. Here is an example of 2 of the forms: 1099-MISC and 1099-NEC
Form 1099-MISC reports the total amount of payments a person receives from a single person or company during the tax year. The IRS requires any person or business to report certain types of payments on a 1099-MISC Form and to the IRS. The type of payments the IRS requires to be reported on this form are:
Form 1099-MISC used to be most commonly used for reporting earnings of independent contractors and consultants, both types of employment where the person employed is not an employee of the company.
- Awards and substitute payments in lieu of dividends
This is also known as nonemployee compensation.
Starting in the 2020 tax year all nonemployee compensation will be reported on a new form, Form 1099-NEC.
Form 1099-NEC is a form dedicated to only nonemployee compensation, also known as self-employment income. This is the income that is received when someone is employed by an employer as an independent contractor versus an employee. Basically, Form 1099-NEC is an entire form dedicated to Box 7 on Form 1099-MISC. Subsequently, for tax year 2020, Box 7 has been removed from Form 1099-MISC. Essentially, Form 1099-NEC serves a similar purpose as Form W-2 does for employees. That purpose is to report the total amount of payments a person receives from a single person or business during the tax year.
Why did the IRS create Form 1099-NEC?
There are two main reasons why it made sense for the IRS to designate a form specifically for nonemployee compensation.
- More and more people are working as independent contractors making it make more sense to have a tax form dedicated specifically to this income.
- Previously, when nonemployee compensation was reported on Form 1099-MISC, it had a different deadline date than the form itself. Therefore, it didn’t make sense to use one form for payments that have two different deadline dates with the IRS.