It is common for businesses to use non-employee labor on new projects and partnerships. However, if you are new to the world of the contingent workforce, filing taxes for the first time may be confusing. Do you want to know what nonemployee compensation is? We will discuss nonemployee compensation vs. other income on Form 1099-NEC, box 7, and how to classify a non-employee when you want to file taxes.
What Is Nonemployee Compensation?
Nonemployee compensation refers to money paid to independent contractors who work for your company. Sales commissions, awards, prizes, and payments for completing tasks are examples of this type of compensation.
Unlike employee wages, you are not required to withhold taxes on nonemployee compensation because contractors pay these taxes themselves. It is critical to properly classify your employees so that you can determine whether their earnings are wages or nonemployment compensation.
Who is Eligible for Nonemployee Compensation?
Nonemployment compensation can only be paid to independent contractors and other workers who are not classified as employees. The level of control you have over when, how, and where their work is done is what distinguishes employees from contractors.
Nonemployee Compensation vs Other Income
Before 2020, business owners reported nonemployee compensation and other types of income on a single universal form, Form 1099-MISC (e.g., rent). However, after a 38-year absence, Form 1099-NEC returned in 2020.
If you own a business and pay contractors or vendors, you should understand the differences between Forms 1099-NEC and 1099-MISC. You can then fill out, distribute, and file the appropriate form.
You may be wondering, “Where do I even begin with Form 1099-NEC vs. MISC?” No need to worry—we’ve put together this handy guide to help you understand the distinctions between the forms. Without further ado, here’s everything you need to know about Forms 1099-MISC and 1099-NEC.
There are some significant distinctions between nonemployee compensation vs other income.
Non-employees Compensation
- The money you earn as a contractor, consultant, freelancer, or other independent workers.
- It’s reported on 1099-MISC (Box 7), 1099-K (Box 1a), or as cash, check, or credit card sales transactions.
- It requires you to complete Schedule C.
- You can deduct expenses related to the income.
- Requires you to pay self-employment tax.
Other Income
- It is money you receive as a result of something such as a prize, award, or lawsuit settlement.
- Is most commonly found on a 1099-MISC (Box 3).
- You report it on Form 1040, Line 21.
Nonemployee Compensation on 1099
Nonemployee compensation on 1099 refers to money paid to you as an independent contractor rather than an employee. You must still pay taxes on this money and report it on your tax return as self-employment income.
The Purpose of Each Form
Here’s a rundown of each form and the types of payments you must record.
Form 1099-MISC
Miscellaneous Information Form 1099-MISC is an information return used by businesses to report miscellaneous payments. Fill out Form 1099-MISC for each person to whom you made the following payments during the tax year.
Instead of dividends or tax-free interest, at least $10 in royalties or broker payments. Do not use Form 1099-MISC to report nonemployee compensation after 2020. Also, for W-2 employees, do not use Form 1099-MISC.
When you file a 1099 form, you must also file Form 1096, Annual Summary and Transmittal of United States Information Returns. Form 1096 is a summary of all the Form 1099s you have filed.
Filling out Forms 1099
You must first gather information before completing Forms 1099-NEC and/or 1099-MISC. Here is a list of the information you must have ready for each form.
1099-MISC Form:
- Your name, address, and phone number.
- Your TIN is (Taxpayer Identification Number)
- TIN of the recipient
- Name and address of the recipient
- If applicable, your account number
- Amount paid to the recipient during the tax year
Form 1099 – NEC
For each 1099-NEC you prepare, you must include information about your company. These are some examples:
- Your federal employer identification number
- Company’s name
- Company’s address
In the boxes on the left side of the page, enter the recipient’s taxpayer ID number (Social Security number, employer ID number, or federal tax ID number) as well as your business information.
What Is Nonemployee Compensation 1099-Nec?
The IRS Form 1099-NEC is used to report non-employee compensation paid to independent contractors by employers or businesses. The hiring entity or employer that paid the independent contractors must complete the return and report to the IRS all non-employee compensations made during the tax year.
Who Is Eligible to File Nonemployee Compensation Form 1099-NEC?
Businesses must file a Form 1099-NEC for any non-employee person to whom they pay $600 or more during the fiscal year. This includes payments made to independent contractors for services rendered, cash payments for fish purchased from anyone engaged in the business of catching fish, and payments made to an attorney.
How to File Form 1099-NEC: Nonemployee Compensation
Form 1099-NEC is a simple form to complete. There are no complex fields; only boxes requiring basic information. Follow the steps below to file nonemployee compensation form 1099-NEC in a straightforward manner, removing all reporting complexities.
Step 1: Start with the payee’s information.
Always begin with the payee information because this is the information you must report to the IRS. So, collect the necessary information from your payees, such as their TIN, name, business address, and annual transactional data. Form W-9 can be used to obtain the vendor’s TIN, name, and address.
Step 2: After the TIN Lookup, enter the TIN.
Once you’ve gathered the payee information, it’s critical to simply validate the details before entering them into the form. This logic is especially applicable to TINs, where each TIN discrepancy with the IRS can cost you at least $250 in penalties. TIN matching, particularly real-time TIN matching as provided by Tax1099, allows you to validate as many as 100,000+ TINs in less than a minute, saving you time and accelerating reporting accuracy.
Step 3: Enter your company’s TIN.
After you’ve reported the payee’s information, it’s time to start reporting the information for your entity. Begin by validating your TIN and reporting it in the payer box, just to be safe. Enter the business address as it appears on official records.
Step 4: Calculate and report federal withholdings
If the payee (in this case, an independent contractor) fails to provide their TIN, you can withhold a percentage of the contractor’s payments and report these withholdings in Box 4 of Form 1099-NEC. This box only reports federal tax withholdings from the payee’s payments.
Step 5: Payment of non-employee benefits
On Box 1 of Form 1099-NEC, report the total compensation or the total amount you paid to your freelancer, vendor, or independent contractor in a year. If you pay $400 to a freelance designer every month for six months, you must report $2,400 ($400 x 6) as total nonemployee compensation paid.
Please keep in mind that you cannot file a single 1099 nonemployee compensation form for all of your independent contractors. Form 1099-NEC must be filed for each independent contractor to whom you paid at least $600 in a tax year in the course of your business.
Step 6: Withholdings for state income tax
Certain states require businesses to withhold taxes from contractor payments to ensure tax compliance. In this case, your company must report the amount withheld from the payee’s payments on Box 5 of Form 1099-NEC.
Download Form 1099-NEC: Nonemployee Compensation
The IRS website allows you to download Form 1099-NEC for the tax year 2021. Copy A of the form is in red and is only for informational and Internal Revenue Service purposes.
What Is Nonemployee Compensation 7
Miscellaneous income is reported on Form 1099-MISC. Before 2020, nonemployee compensation was reported using 1099-MISC box 7. Independent contractors who provided services but were not considered employees of the payer were given Forms 1099-MISC instead of Form W-2.
Changes in Income Reporting for 2020: nonemployee compensation 7
If you are a self-employed or independent contractor, you most likely received a 1099-MISC before 2020 and used it to complete your tax return. The 1099-MISC box 7 for nonemployee compensation was also used to report fees, commissions, prizes, awards, and other forms of compensation for services. This form was also used to report golden parachute payments, depending on the agreement.
There are numerous situations where this applies, but the best example is multi-level marketing companies.
Nonemployee Compensation Form 1099-Nec Replaces the 1099-Misc Box 7
If you usually get a 1099-MISC with information in box 7, you will now get a 1099-NEC instead. The rules governing whether you must report nonemployee compensation have not changed. This is merely a change in the reporting mechanism. This information will still be reported on Schedule C when filing federal income taxes in most cases.
Conclusion
So, with this post, we hope to shed more light on what is nonemployee compensation vs other income on Form 1099-NEC in box 7. So please read and leave your thoughts in our comment section; we look forward to hearing from you.
Non-employee Compensation FAQs
When must you file a 1099-NEC?
You must file a 1099-NEC form if you hire contract workers, freelancers, or other service providers for business purposes. If you paid someone $600 or more during the year, you must file the nonemployee compensation form. Use this form to report professional fees paid to attorneys, accountants, or consultants, but not gross settlement payments made to attorneys.
Where do you mail a 1099-NEC?
If you have fewer than 250 1099-NEC forms to file, you may be able to mail them to the IRS. You can also use a private delivery service that has been approved by the IRS. The mailing address is determined by the location of your business. The IRS publication General Instructions for Certain Information Forms (page 7) includes a list of addresses for each state.
Do you have to report nonemployee compensation?
Beginning with the 2020 tax year, business taxpayers will be required to report nonemployee compensation on the new Form 1099-NEC rather than the Form 1099-MISC. Businesses must use this form if they paid $600 or more to a non-employee, such as an independent contractor.
What is the difference between a 1099 Miscellaneous and a 1099 nonemployee compensation?
The 1099-NEC form is now used to report the earnings of independent contractors. The 1099-MISC form, on the other hand, is still in use; it’s just used to report miscellaneous income, such as rent or payments to an attorney. Although the 1099-MISC form is still in use, contractor payments made in 2020 and later will be reported on the 1099-NEC form.
