I am an accountant that deals with income taxes in a small town Woodland Park in Colorado.
Our City received a Corona Virus Relief Fund (grant) and passed it to dozens of local businesses. These businesses received 1099-NEC as though they were performing services. They were not. Thus issuing the 1099-NEC in this situation does not agree with 1099-NEC instructions, page 7: https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

I have asked the City to issue 1099-MISC, box 3, "Other Income" but they insist on issuing a 1099-NEC, box 1.

The only information on this topic I found is at:
https://www.irs.gov/newsroom/cares-act-coronavirus-relief-fund-frequently-asked-questions

"The receipt of a government grant by a business generally is not excluded
from the business's gross income under the Code and therefore is taxable."

Is employment tax due without being an independent contractor?
I think not...

I know of some CVRF recipients that have paid employment taxes on their CVRF grant already. In the USA, millions must be affected. This is not right.

An IRS and/or Colorado Department of Revenue* clarification is needed if this grant is subject to employment tax. This would determine if issuing a 1099-NEC is correct or not.

I appreciate your response.

Thank you,
Eva Putnam
All Tax Solutions Ltd
719-686-7796

P.S.
About CVRF being subject to employment (SE) tax: It would be unfair to sole proprietorships and partnerships because S-Corps would not pay SE tax. All profit passed to shareholders of an S-Corporation via K-1 is NOT subject to SE tax. There is no place to include 1099-NEC in S-Corp tax return. When you click on 1099-NEC, the 1099-MISC opens up, no old box 7... All sole proprietor's profit is SE taxed. Similarly for partners, except for limited partners... IRC seems to be fair... and it should be in this case also...

Per IRS release on 03/17/2021, Unemployment Compensation may NOT be taxable. Why CVRF would be at all and why subject to SE?

PPP (Paycheck Protection Program) is classified as non-taxable gain...

* Montana issued 1099-G for CVRF Business (perhaps, to owners):
https://mtrevenue.gov/2021/01/25/covid-business-grant-income-taxable-in-montana/

IR-2021-70, March 30, 2021
"Emergency aid granted to students due to COVID is not taxable." If they were, 1099-MISC is mentioned, not 1099-NEC:
https://www.irs.gov/newsroom/emergency-aid-granted-to-students-due-to-covid-is-not-taxable

As of February 18, 2021 "For taxable years beginning on or after January 1, 2021, and before January 1, 2026, gross income does not include the amount of a grant awarded pursuant to the California Small Business COVID-19 Relief Grant Program."
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB994