After a 38-year absence, Form 1099-NEC is making its return in the 2020 tax year. For the last few decades, business owners were responsible for using Form 1099-MISC to report nonemployee compensation. But with Form 1099-NEC, employers can say hello to a revamped form and goodbye to reporting nonemployee compensation on Form 1099-MISC.
So, move over, Form 1099-MISC. There’s a new sheriff in town and its name is Form 1099-NEC.
Overview of Form 1099-MISC
Form 1099-MISC, Miscellaneous Income, is an information return businesses use to report payment types, such as payments made to independent contractors. You can also use Form 1099-MISC to report other payments, like royalties and rents.
Form 1099-MISC is like Form W-2 but for independent contractors. Independent contractors use Form 1099-MISC to make tax payments based on what businesses paid them during the year.
Send Form 1099-MISC to any contractors you paid $600 or more to throughout the year. Also, file Form 1099-MISC if you make any of the following payments over $600:
- Fishing boat proceeds
- Medical and health care payments
- Substitute payments in lieu of dividends or interest
- Crop insurance proceeds
- Excess golden parachute payments
- Gross proceeds paid to an attorney
What is Form 1099-NEC?
Form 1099-NEC, Nonemployee Compensation, is a form that solely reports nonemployee compensation. Form 1099-NEC is not a replacement for Form 1099-MISC. Form 1099-NEC is only replacing the use of Form 1099-MISC for reporting independent contractor payments.
And, it is actually not a new form. Form 1099-NEC was last used in 1982. However, the IRS is reviving the form in 2020. So … why is the IRS bringing back Form 1099-NEC?
Before the Protecting Americans from Tax Hikes Act (PATH Act), taxpayers could file one Form 1099-MISC to report nonemployee compensation and miscellaneous income items by February 28 each year. In 2015, the PATH Act changed the Form 1099-MISC due date to January 31 for reporting nonemployee compensation.
Because of the due date change for nonemployee compensation, taxpayers had to begin separating nonemployee compensation using two Forms 1099. This change not only caused a lot of confusion for employers and taxpayers, but also caused the IRS to mistakenly treat forms received after the January 31 deadline as late returns.
The IRS has brought back Form 1099-NEC to separate nonemployee expenses and clear up the confusion.
Prior to 2020, you would include nonemployee compensation in Box 7 on Form 1099-MISC. In 2020, Box 7 on Form 1099-MISC will turn into “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale,” and nonemployee compensation must be reported on Form 1099-NEC instead.
What do you report on Form 1099-NEC?
Again, use Form 1099-NEC to report nonemployee compensation. Nonemployee compensation includes the following payment types to independent contractors:
- Other forms of compensation for services
If you pay an independent contractor nonemployee compensation, separate nonemployee compensation payments from all of your other Form 1099-MISC payments.
Starting up again in 2020, fill out Form 1099-NEC if you have any workers you paid $600 or more to in nonemployee compensation.
Where do you send Form 1099-NEC?
Like Form 1099-MISC, there are multiple copies of Form 1099-NEC you must distribute.
Check out each copy and its recipient below:
- Copy A: The IRS
- Copy 1: State tax department, if applicable
- Copy B: Independent contractor
- Copy 2: Independent contractor
- Copy C: Keep in your business records
You can file Form 1099-NEC electronically or you can mail it to the IRS. To e-File Form 1099-NEC, use the IRS’s FIRE system.
What do you include on Form 1099-NEC?
As a reminder, newly hired independent contractors must fill out Form W-9. Then, use Form W-9 to report nonemployee compensation at the end of the year.
When filling out Form 1099-NEC, include the following information:
- Business’s name, address, and phone number
- Business’s TIN (Taxpayer Identification Number)
- Recipient’s name, address, and TIN
- Total nonemployee compensation
- Federal and state income tax withheld
For more information on how to fill out the form, check out the IRS’s website and 1099-NEC instructions.
What is the due date for Form 1099-NEC?
Not only do employers have to keep the new Form 1099-NEC on their radars, but they also need to mark their calendars for a new nonemployee compensation due date.
Starting in 2021, send copies of Form 1099-NEC to workers you paid nonemployee compensation to during the year by February 1.
Also file Copy A with the IRS by February 1 each year.
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This is not intended as legal advice; for more information, please click here.