Definition
An IRS form used to report payments of $600 or more made to non-employees such as independent contractors, freelancers, and self-employed individuals during the tax year.
US Context
The IRS, DOL, and state agencies actively investigate worker misclassification. Many states have adopted the ABC test for determining independent contractor status, which presumes a worker is an employee unless the hiring entity demonstrates the worker is free from control, performs work outside the usual course of business, and is independently established in that trade. California's AB5 law and similar state laws have made it harder to classify workers as independent contractors.
Best Practices
- Collect a completed W-9 from every independent contractor before making the first payment
- Track all contractor payments throughout the year and issue 1099-NEC forms for payments totalling $600 or more
- Apply the IRS behavioural, financial, and relationship tests before classifying any worker as an independent contractor
- File 1099-NEC forms with the IRS and furnish copies to payees by January 31 — no extensions are available
Frequently Asked Questions
What is the difference between a 1099-NEC and a 1099-MISC?
The 1099-NEC reports non-employee compensation (payments for services by independent contractors). The 1099-MISC reports other types of payments such as rents, royalties, prizes, and awards. Prior to 2020, non-employee compensation was reported in Box 7 of 1099-MISC.
Do I need to issue a 1099 for payments under $600?
No. The reporting threshold for 1099-NEC is $600 per payee per year. However, the recipient is still responsible for reporting the income on their tax return regardless of whether they receive a 1099.
What are the risks of worker misclassification?
Employers who misclassify employees as independent contractors may be liable for back employment taxes, penalties, interest, unpaid benefits, workers' compensation premiums, and unemployment insurance contributions. The IRS Section 530 relief may reduce penalties for good-faith misclassification.