What Form 1099-MISC Box 7 Is For

Form 1099-NEC did not exist as a separate form in 2016. During the 2016 tax year, nonemployee compensation was reported in Box 7 of Form 1099-MISC. The standalone Form 1099-NEC was reintroduced by the IRS beginning with the 2020 tax year. This guide covers how nonemployee compensation was handled during the 2016 tax year using Form 1099-MISC.

Form 1099-MISC Box 7 was used in 2016 to report payments of $600 or more made to independent contractors, freelancers, and other non-employees for services performed in your trade or business. This box captured what we now call ""nonemployee compensation""—money paid to people who work for you but aren't on your payroll as W-2 employees.

Common recipients included independent contractors, consultants, freelancers, attorneys (for their fees), directors receiving board fees, lottery sales agents receiving commissions, and anyone selling fish for cash to businesses. The key distinction: these individuals received payment for services but weren't treated as employees, meaning no payroll taxes were withheld from their compensation.

Businesses, nonprofits, and government agencies all had to file this form when conducting trade or business activities. Personal payments—like paying your neighbor to mow your lawn as a favor—didn't count. The IRS used Box 7 specifically because these payments typically triggered self-employment tax obligations for recipients, unlike other types of miscellaneous income reported elsewhere on Form 1099-MISC. IRS

When You’d Use It (Late Filing/Amended Returns)

Original Filing Timeline for 2016

Original Filing Timeline for 2016: The IRS implemented a critical deadline change for 2016: If you reported nonemployee compensation in Box 7, you had to file Form 1099-MISC with the IRS by January 31, 2017—not the later February or March deadlines that applied to other boxes on the form. This accelerated deadline was designed to help the IRS combat tax refund fraud by having income information earlier in the filing season. You still had to furnish Copy B to recipients by January 31, 2017, the same as always.

Late Filing Situations

Late Filing Situations: If you missed the January 31 deadline, you should file as soon as possible. The IRS assessed penalties based on how late you filed: $50 per form if filed within 30 days, $100 per form if filed by August 1, and $260 per form after August 1 or if you never filed (2016 penalty amounts). These penalties could be reduced or waived if you could show reasonable cause for the delay—such as a natural disaster, serious illness, or circumstances beyond your control.

Amended Returns

Amended Returns: If you discovered errors after filing—wrong payment amount, incorrect taxpayer identification number, missing recipient—you needed to file a corrected Form 1099-MISC. Check the ""CORRECTED"" box at the top of the form, include all correct information (not just what changed), and submit it to the IRS. Don't check the ""VOID"" box, as that tells IRS scanners to skip the form entirely. Also provide a corrected copy to the recipient so they could amend their tax return if necessary. IRS

Key Rules or Details for 2016

The $600 Threshold

The $600 Threshold: You had to file Form 1099-MISC if you paid $600 or more during the calendar year to any single non-employee for services. This threshold applied to the total payments for the year, not individual transactions. Even if you paid someone $50 per month for twelve months (totaling $600), you had to file.

Trade or Business Requirement

Trade or Business Requirement: Reporting only applied when payments were made ""in the course of your trade or business."" If you hired a contractor to repair your business property, you must report it. If you hired someone to paint your personal residence, you didn't need to file Form 1099-MISC—that's a personal expense.

Who Gets Reported

Who Gets Reported: Generally, you reported payments to individuals, partnerships, estates, and in specific cases, limited liability companies. There was a broad exemption for payments to corporations, but important exceptions existed: you always had to report payments to attorneys and law firms (even corporations), medical and health care payments to corporations, fish purchases for cash, gross proceeds paid to attorneys, and payments made by federal executive agencies for services.

What Counts as Nonemployee Compensation

What Counts as Nonemployee Compensation: Box 7 captured fees, commissions, prizes and awards for services (not for random drawings), payments for services including parts and materials when incidental to the service, oil and gas working interest payments, cash paid for fish purchases, directors' fees, lottery agent commissions, and payments to attorneys for legal services.

Special 2016 Filing Deadline

Special 2016 Filing Deadline: The January 31 filing deadline for Box 7 was new in 2016, enacted by Public Law 114-113, Division Q, Section 201. Previously, paper filers had until the end of February. This change caught many businesses off guard, so understanding this accelerated deadline was crucial for 2016 compliance. IRS

Step-by-Step (High Level)

Step 1: Identify Who Needs Forms

Step 1: Identify Who Needs Forms At the start or throughout the year, have all contractors and non-employees complete Form W-9 to collect their name, address, taxpayer identification number (Social Security Number or Employer Identification Number), and business structure. This prevents scrambling for information at year-end and helps you avoid backup withholding requirements.

Step 2: Track Payments

Step 2: Track Payments Maintain accurate records of all payments to non-employees throughout the year. Your accounting software should categorize contractor payments separately. At year-end, total up payments per recipient. Anyone receiving $600 or more requires a Form 1099-MISC.

Step 3: Obtain Official Forms

Step 3: Obtain Official Forms You couldn't use forms printed from the IRS website because Copy A has special scannable red ink that doesn't reproduce properly. Instead, order official forms from the IRS at IRS.gov/EmployerForms, purchase them from office supply stores, or use IRS-approved tax preparation software that can generate compatible forms.

Step 4: Complete the Forms

Step 4: Complete the Forms Fill out a separate Form 1099-MISC for each recipient. Enter your business information as the payer, the recipient's information from their Form W-9, and the total payment amount in Box 7. Include any backup withholding in Box 4 if applicable. Double-check taxpayer identification numbers—mismatches trigger IRS notices.

Step 5: Distribute and File

Step 5: Distribute and File Provide Copy B to each recipient by January 31, 2017 (for 2016 tax year). File Copy A with the IRS by January 31, 2017 (the accelerated deadline for Box 7), along with Form 1096 (a transmittal summary form) if filing by paper. If filing electronically, the deadline was also January 31, 2017 for Box 7 payments. Electronic filing was required if you had 250 or more information returns of any type.

Step 6: Keep Records

Step 6: Keep Records Retain copies of all Forms 1099-MISC and supporting documentation for at least four years in case of IRS audits or recipient inquiries. IRS

Common Mistakes and How to Avoid Them

Missing the January 31 Deadline

Missing the January 31 Deadline: The most significant new mistake in 2016 was treating Box 7 forms like other 1099-MISC boxes. Many filers didn't realize nonemployee compensation had an accelerated deadline and missed the January 31 filing date. Solution: Mark your calendar specifically for Box 7 forms—January 31 for both recipient copies and IRS filing.

Failing to Collect Form W-9

Failing to Collect Form W-9: Starting work with contractors without getting their taxpayer identification number creates major headaches. Without a TIN, you're required to backup withhold 28% of payments (2016 rate), which contractors hate. Solution: Make Form W-9 completion part of your contractor onboarding process before issuing the first payment.

Wrong Taxpayer Identification Numbers

Wrong Taxpayer Identification Numbers: Entering incorrect Social Security Numbers or Employer Identification Numbers is extremely common and triggers IRS ""B"" notices asking you to correct the information. Solution: Verify TINs using the IRS TIN Matching Program, and always double-check numbers against the completed Form W-9.

Misclassifying Workers

Misclassifying Workers: Some businesses issue Forms 1099-MISC to workers who should actually be W-2 employees. The IRS can reclassify workers and assess back payroll taxes, penalties, and interest. Solution: Understand worker classification rules (IRS provides Form SS-8 to request a determination). When in doubt, consult a tax professional—misclassification is expensive.

Reporting Payments to Corporations

Reporting Payments to Corporations: Many filers report payments to incorporated contractors, unaware of the corporation exemption. While this isn't penalized, it wastes time and can confuse recipients. Solution: Check the business structure on Form W-9—most corporations (C-corps and S-corps) don't need Box 7 reporting, but remember the attorney exception.

Incorrect Box Selection

Incorrect Box Selection: Some income belongs in Box 3 (Other Income) instead of Box 7, such as prizes not awarded for services, payments to deceased employees' estates, and payments to former insurance salespeople meeting specific criteria. Solution: Review the detailed instructions for each box—the IRS uses box placement to determine if the recipient owes self-employment tax.

Not Filing Corrected Forms

Not Filing Corrected Forms: When you discover errors, some businesses hope no one notices rather than filing corrections. The IRS matching program will catch discrepancies between your 1099 and the recipient's tax return. Solution: File corrected forms as soon as you discover errors, no matter how small. IRS

What Happens After You File

IRS Processing

IRS Processing: The IRS enters your Form 1099-MISC information into its computer systems and matches it against recipients' tax returns. This matching program cross-references the income you reported against what contractors claim on their Schedule C or other tax forms. Mismatches trigger automated notices to either you or the recipient, asking for explanations or corrections.

Recipient Actions

Recipient Actions: Recipients use Copy B to prepare their tax returns. Most will report Box 7 income on Schedule C (Profit or Loss from Business) if they're self-employed, which flows to Form 1040. They'll also complete Schedule SE to calculate self-employment tax (Social Security and Medicare) on this income—typically 15.3% of net earnings. Unlike W-2 employees, independent contractors pay both the employee and employer portions of these taxes.

Backup Withholding Situations

Backup Withholding Situations: If you backup withheld federal income tax because a contractor didn't provide a TIN or the IRS notified you of a mismatch, that withholding amount appears in Box 4. The recipient claims this as a credit on their tax return, just like W-2 withholding. You must deposit backup withholding with the IRS according to the same schedule as payroll tax deposits.

Penalty Assessment

Penalty Assessment: If you filed late, incorrectly, or not at all, the IRS will assess penalties. You'll receive a notice explaining the penalty and how it was calculated. You can respond to request penalty abatement if you have reasonable cause. Common accepted reasons include fire, natural disaster, death or serious illness, or unavoidable absence of the person responsible for filing.

State Filing Requirements

State Filing Requirements: Most states require their own information return filing or accept federal forms. Check your state's department of revenue website for specific requirements. Some states have different thresholds or additional reporting categories. IRS

FAQs

Q1: Do I need to send Form 1099-MISC to an LLC?

It depends on how the LLC is taxed. If the LLC is taxed as a sole proprietorship (single-member LLC) or partnership, yes—issue the form using the LLC's EIN. If the LLC elected to be taxed as an S-corporation or C-corporation, generally no, unless you're paying attorney fees or medical services. The Form W-9 should indicate the LLC's tax classification.

Q2: What if a contractor doesn't provide their Social Security Number or EIN?

You must backup withhold 28% (2016 rate) of each payment and remit it to the IRS, then report the gross payment (before withholding) in Box 7 and the withheld amount in Box 4. Continue requesting the TIN. Contractors who refuse to provide their TIN may face penalties under Section 6723, but your withholding obligation protects you from liability.

Q3: Can I file Form 1099-MISC for payments under $600?

You're not required to, but you can. Some businesses file for all contractors regardless of amount to maintain complete records. However, this creates unnecessary paperwork for both you and the IRS. Generally, only file if you paid $600 or more, or if you backup withheld any amount (backup withholding triggers filing regardless of payment total).

Q4: What's the difference between Box 7 (Nonemployee Compensation) and Box 3 (Other Income)?

Box 7 is for payments made for services performed—implying an ongoing business relationship where the recipient is in the trade or business of providing those services. These payments generally trigger self-employment tax. Box 3 is for miscellaneous payments like prizes not awarded for services, certain damages, payments to deceased employees' beneficiaries, and sporadic or hobby income that might not be subject to self-employment tax. The distinction matters because it affects the recipient's tax obligations.

Q5: I hired a contractor to fix my office building. Do I report the full amount including materials?

Yes, if supplying the materials was incidental to providing the service. For example, if you hired a contractor for $10,000 to repair your building, and $2,000 was materials, report the full $10,000 in Box 7. The materials were necessary to complete the repair service. However, if you separately purchased $2,000 in materials from a supplier and paid the contractor $8,000 for labor only, you'd report only the $8,000 (and the supplier doesn't get a Form 1099-MISC because you purchased products, not services).

Q6: Do I need to file for payments made through PayPal or credit cards?

Generally, no. Payments made through payment cards (credit cards, debit cards) or third-party payment networks like PayPal are reported by the payment settlement entity on Form 1099-K, not by you on Form 1099-MISC. However, if you paid by direct bank transfer, check, or cash, you must file Form 1099-MISC. This prevents duplicate reporting.

Q7: What happens if I realize I made a mistake after the January 31 deadline?

File a corrected Form 1099-MISC as soon as possible. Check the ""CORRECTED"" box, fill in all information correctly (not just what changed), and submit it to the IRS with a new Form 1096 if filing by paper. Send a corrected copy to the recipient so they can amend their tax return if necessary. Late corrections are better than no corrections—the IRS matching program will eventually catch discrepancies, and proactive correction demonstrates good faith compliance.

For More Information: Visit IRS.gov/Form1099MISC for current forms and instructions, or reference the 2016 Instructions for Form 1099-MISC and the 2016 General Instructions for Certain Information Returns for comprehensive guidance specific to the 2016 tax year.