More and more companies, especially ones working across borders and time zones, are turning to contractors. Not just because it's trendy, but because it actually makes sense. You get access to specialized talent. You can scale quickly. You can hire someone in Berlin on Monday and have them building your product by Thursday. It's kind of amazing.
But then comes the paperwork. Because while contractors offer all these benefits, they also come with a different kind of responsibility, one thing that's a little less exciting: tax forms.
This is where a lot of companies hit a wall. You've got to pay contractors of course, but how do you do it right? You're not filing a W-2, because they're not employees. Instead, you're looking at this fork in the road: Form 1099-NEC…or 1099-MISC?
That's what we're talking about today. What's the difference between these two forms? Why do they exist? And how do you make sure you're staying compliant?
This guide walks through all of that. No IRS jargon, just plain English. Because if you're building a distributed workforce, understanding contractor compensation isn't just a detail, it's part of doing it well.
What is Form 1099-NEC?
Form 1099-NEC (non-employee compensation) is a tax form that U.S. businesses use to report payments of more than $600 to U.S. contractors, consultants, freelancers, and other self-employed people who perform services for the company but aren't permanent employees.
Read more: Pros and Cons of Hiring Independent Contractors
Who should file Form 1099-NEC?
Businesses must report and file any compensation exceeding $600 annually for anyone who is not an employee. Companies use Form 1099-NEC to report this information to the IRS.
What should be reported?
A business reporting non-employee compensation on Form 1099-NEC must include the following information:
- Business's name, address, phone number, and Federal Employer Identification Number (FEIN)
- Nonemployee's name, address, and Tax Identification Number (TIN) as reported on their Form W-9
- State identification number
- Non-employee compensation exceeding $600 paid during the previous year
What is Form 1099-MISC?
Form 1099-MISC is a tax form that reports miscellaneous income over $600, not part of compensation. Before 2020, Form 1099-MISC reported contractor or sole proprietor income, but now it's only used to report miscellaneous payments.
According to the IRS, businesses or individuals must report payments for the following:
- Rent payments
- Royalties
- Prizes and awards
- Attorney payments
- Medical and health care payments
- Crop insurance proceeds
- Any fishing boat proceeds
- Cash payments from fishing
- Payments of $10 or more in broker payments or royalties in placement of dividends or tax-exempt interest
- Earnings through the direct sale of consumer products intended for resale surpassing $5,000
Who should file Form 1099-MISC?
A business must file Form 1099-MISC if they paid over $600 to an individual or entity for miscellaneous expenses such as rent, prizes, awards, or attorney payments.
What should be reported on Form 1099-MISC?
Businesses must report the following information on the Form-MISC:
- Business's name, address, phone number, and FEI
- Recipient's name, address, and TIN as reported from their Form W-9
- State identification number
- Applicable boxes for specific types of income reported, such as rent, royalties, or prizes and awards
- Withholding boxes for federal or state income tax
- Any foreign assets subject to withholding under the Foreign Account Tax Compliance Act
Form 1099-NEC vs. Form 1099-MISC
Businesses use both tax forms 1099-NEC and 1099-MISC to report payments of more than $600 to non-employees. The differences include what those payments are for and the employment relationship.
Before 2020, companies reported all non-employee compensation in box seven on Form 1099-MISC. Due to confusion regarding dual-filing deadlines on Form 1099-MISC, the IRS introduced Form 1099-NEC for reporting non-employee compensation.
Currently, the two forms are for reporting payments:
How to file Form 1099-NEC
Here's what you need to know to complete and file Form 1099-NEC.
1. Gather the appropriate information
To fill out Form 1099-NEC, you need your recipient's W-9. Their W-9 form gives you the information you need to complete the 1099. It includes the following details about the recipient:
- Name
- Business entity or relationship (freelancer, proprietor, contractor, business, etc.)
- Address
- TIN (SSN, EIN, etc.)
2. Fill out Form 1099-NEC
To fill out Form 1099-NEC, input your business and recipient's information. Also, include how much you paid the non-employee and how much tax (if any) you withheld.
The information you fill out on Form 1099-NEC includes:
- Payer name or business
- Payer's tax information
- Recipient's name or business name
- Recipient's address
- Account number (if applicable)
- Non-employee compensation
- State withholdings (if applicable)
- Federal withholdings (if applicable)
Ensure all information is accurate and complete before sending Form 1099-NEC.
3. Send Form 1099-NEC
You can send Form 1099-NEC physically with a scannable template from the IRS or electronically through software or services compatible with the IRS's Filing Information Returns Electronically (FIRE) system. You must submit two copies of Form 1099-NEC, which include:
- Copy A. This copy goes to the IRS.
- Copy B. This copy is for the contractor or freelancer.
Keep a copy for your records, and file on time to avoid penalties.
Depending on where you live, you may also need to file Form 1099-NEC with the state. You are not obligated to submit filings to the state in the following states:
- Alaska
- Florida
- Illinois
- Nevada
- New Hampshire
- New York
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
If you live in any U.S. state not listed above, you must file Form 1099-NEC to your state. If you file electronically, the IRS may sometimes file with the state for you. A tax compliance partner can help you navigate exactly where and when to file.
Deadline for filing 1099-NEC
You must send all copies of Form 1099-NEC by January 31 each year for non-employee payments made the prior year.
1099-NEC penalties
Missing the 1099-NEC filing deadline could result in IRS penalties ranging from $50 to $270 per form, depending on how late you submit them.
If you need more time, request a filing extension by submitting paper Form 8809 (Application for Extension of Time To File Information Returns) by January 31 to the IRS. You must mail Form 8809 and can't file it online.
How to file Form 1099-MISC
Filing Form 1099-MISC is a similar process to filing the 1099-NEC, but there are additional sections to complete.
1. Gather the appropriate information
Similar to Form 1099-NEC, start by gathering your recipient's and payment information. Obtain a completed Form W-9 from the recipient receiving income. The W-9 verifies the recipient's identity and collects their TIN.
Also, keep track of your miscellaneous payment information.
2. Fill out Form 1099-MISC
To fill out Form 1099-MISC, you must input your information, your recipient's information, and any relevant payment information, including:
- Payer's name and address
- Payer's tax information
- Recipient's name and address
- Recipient's tax information
From there, you'll see boxes broken down by payment type correlating to the miscellaneous payments to report on Form 1099-MISC. Input your payment information as needed down the line.
These boxes include:
- Rents
- Royalties
- Federal income tax withheld
- Fishing boat proceeds
- Medical and health care payments
- Direct sales totaling $5,000 or more of consumer products to recipient for resale
- Substitute payments in placement of dividends or interest
- Crop insurance proceeds
- Gross proceeds paid to an attorney
- Fish purchased for resale
- Excess golden parachute payments
- Nonqualified deferred compensation
- State tax withheld
3. Send Form 1099-MISC
As with Form 1099-NEC, send two copies of Form 1099-MISC electronically or physically:
- Copy A. This copy goes to the IRS.
- Copy B. This copy goes to the recipient.
Keep a copy for your records, and send Form 1099-MISC on time to avoid penalties.
Deadline for filing 1099-MISC
You must file Form 1099-MISC with the IRS by February 28 if filing by mail and March 31 if filing electronically.
1099-MISC penalties
You must file Form 1099-MISC accurately and on time to avoid IRS penalties. The penalty for late or incorrect filing varies based on the delay.
To request additional time, you must mail a paper Form 8809 (Application for Extension of Time To File Information Returns) to the IRS by January 31.
Should I fill out Form 1099-NEC or 1099-MISC for international contractors?
Neither. When hiring and paying international contractors, U.S. companies should use Form W-8BEN. This tax form classifies a foreign worker's status as a non-U.S. citizen and determines proper tax reporting and withholdings for the entity providing them income.
If you hire or engage international talent, request a W-8BEN before putting them on payroll or providing compensation. An employee or contractor typically needs to fill out a W-8BEN Form if they apply to the following criteria:
- They are not a U.S. citizen
- They are not a U.S. resident
- They do not have a Green Card
- They performed the work outside of the U.S.
- They are the beneficial owner of the income provided
Pay global talent, but with compliance and ease
When you're scaling fast and hiring contractors around the world to get the job done, there comes a less glamorous part: how to actually pay them, and to do it right. International contractor payments aren't simple. Each country has its own tax rules, labor laws, and compliance hurdles. Get it wrong, and the risks are real-misclassification, fines, and legal headaches.
That's where Pebl comes in, with our market-leading Employer of Record (EOR) services. If you're using contractors as a short-term strategy to break into new markets, we'll help you stay compliant. And when it's time to turn those contractors into full-time employees? We handle that too-legally and seamlessly-in over 185 countries.
Our global employment solutions and robust partner network make your job easy. If you're walking that line between agility and compliance, you don't have to do it alone. That's the story here. Global hiring is hard, but it doesn't have to be.
In the end, you get to keep growing. Fast and without tripping over the fine print. Contact us to find out how.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided "as is," and no representations are made that the content is error-free.
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Topic:
Contractors
