After a 38-year absence, Form 1099-NEC made 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 IRS Form 1099-MISC
Form 1099-MISC, Miscellaneous Information, is an information return businesses use to report miscellaneous payments (e.g., rents and royalties).
File Form 1099-MISC for each person you have given the following types of payments to during the tax year:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in the following:
- Rents
- Prizes and awards
- Other income payments
- Cash from a notional principal contract to an individual, a partnership, or an estate
- Any fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney for legal services (NOT fees)
- Fish purchased for resale
- Section 409A deferrals
- Nonqualified deferred compensation
Do not use Form 1099-MISC for W-2 employees. And as of tax year 2020, do not use Form 1099-MISC to report independent contractor payments (that’s where Form 1099-NEC comes into play).
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, the 1099-NEC is actually not a new form. It was last used in 1982. However, the IRS revived the form in 2020. So … why is the IRS bringing back Form 1099-NEC?
Before the 2015 Protecting Americans from Tax Hikes Act (PATH Act), taxpayers could file one Form 1099-MISC to report nonemployee compensation and miscellaneous payments by February 28 each year. 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 business owners and taxpayers, but it 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 turned into “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale,” and nonemployee compensation is reported on Form 1099-NEC instead.
What is reported on 1099-NEC?
Again, report nonemployee compensation on Form 1099-NEC. Nonemployee compensation typically includes fees, commissions, prizes, and awards.
File Form 1099-NEC for each person you paid the following to during the year:
- $600 or more in:
- Services performed by someone who is not your employee (e.g., independent contractor). This includes payments for parts or
materials used to perform the services OR - Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish OR
- Payments to an attorney (Attorneys’ fees of
$600 or more paid in the course of your trade or business)
- Services performed by someone who is not your employee (e.g., independent contractor). This includes payments for parts or
Report the above payments in box 1 on Form 1099-NEC.
Also file Form 1099-NEC for each person you have withheld any federal income tax (box 4) under the backup withholding rules (regardless of the amount of the payment).
You must typically report a payment as nonemployee compensation if all of the following conditions apply:
- You made the payment to an individual who is not your employee
- The payment was for services in the course of your trade or business
- You made the payment to an individual, a partnership, an estate, or a corporation
- Payments to the payee were at least $600 during the year
If you pay an independent contractor nonemployee compensation, separate nonemployee compensation payments from all of your other Form 1099-MISC payments.
You must know how to fill out a 1099-NEC if you have any workers you paid $600 or more to in nonemployee compensation.
Where do you send Form 1099-NEC?
You need to know where to file 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. Where you mail your completed form depends on your state. To e-File Form 1099-NEC, use the IRS’s FIRE system.
| Want to learn more about filing Form 1099-NEC with the state? Download our FREE guide on your 1099-NEC and 1099-MISC state filing requirements, complete with deadlines and state government links! |
What do you include on Form 1099-NEC?
As a reminder, newly hired independent contractors must fill out Form W-9. Then, you can use their Form W-9 to fill out Form 1099-NEC.
When filling out Form 1099-NEC, include the following information:
- Your name, address, and phone number
- Your TIN (Taxpayer Identification Number)
- Recipient’s name, address, and TIN
- Total nonemployee compensation
- Federal and state income tax withheld (if applicable)
For more information on how to fill out the form, check out the IRS’s website and 1099-NEC instructions.
When is the Form 1099-NEC deadline?
Not only do employers have to keep the new 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 January 31 or the next business day (if it falls on a weekend).
Also file Copy A with the IRS by January 31 each year.
This article has been updated from its original publication date of March 17, 2020.
This is not intended as legal advice; for more information, please click here.