Q: What is the 1099-NEC Form and when does it go into effect?
Learn about IRS 1099-NEC Form, how it’s different from the 1009-MISC, and when you need to send one.
The IRS re-introduced the 1099-NEC Form for tax reporting in 2020. What was previously Box 7 on Form 1099-MISC has now become Box 1 on Form 1099-NEC (and Box 7 on the 1099-MISC has been removed).
Here’s what you need to know about what it is, how to file it, and how it is different from the 1099-MISC.
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What is IRS Form 1099-NEC?
The NEC in 1099-NEC stands for nonemployee compensation. Also known as self-employment income, nonemployee compensation is income received from a business (the payer) who classifies the payee as an independent contractor rather than an employee. By instituting the 1099 NEC, the IRS would streamline income reporting for all self-employed people.
When does the 1099-NEC Form go into effect?
The IRS has brought the 1099-NEC Form back for the 2020 tax year (to be filed in 2021). The 1099-NEC Form was last used in 1982 when the IRS depreciated it. The IRS had moved the information on Form 1099-NEC to Form 1099-MISC Box 7, beginning with payments made in 1983.
When do I use the Form 1099-NEC?
- It is made to someone who is not your employee; and
- It is made for services in the course of your trade or business; and
- It was made to an individual, partnership, estate, or, in some cases, a corporation; and
- The payments made to that payee were at least $600 or more for the year (as is the case for the 1099-MISC Form).
Note that there is an exemption to the $600/year payment. You must also file a 1099-NEC Form for each person from whom you have withheld any federal income tax due to backup withholding, regardless of the amount of the payment. (Note that the receipt of a W9 Form from such a person stating a backup withholding requirement triggers your obligation to withhold federal income tax accordingly.)
What are some examples of payments that must be reported on the 1099-NEC Form?
There are many instances in which you must report incomes on IRS Form 1099-NEC. Here are a few examples:
- Professional service fees to attorneys (including law firms established as corporations), accountants, architects, etc.
- Fees paid by one professional to another (for example, if you are splitting the fee)
- Payments for services including payment for parts or materials used to perform the services if they were incidental to the service
- Prizes and awards
- Commissions paid to nonemployee salespeople not repaid during the year
Note that legal fees should be reported on 1099-NEC, even if that attorney, law firm, or legal service provider is a corporation (or an LLC taxes as a corporation). Legal services are an exception to the rule that you do not have to report payments made to corporations.
What are some examples of exceptions to reporting payments on Form 1099-NEC?
There are several cases in which payments that meet the criteria listed above regarding the use of IRS 1099-NEC Form should be reported on other forms. Here are some examples:
- Payments and expense reimbursements for employees (should be reported in the W-2 Form)
- Payments to a corporation (including a limited liability company (LLC) that is treated as a C or S corporation) unless that payment was made for legal services, even if that attorney, law firm, or legal service provider is a corporation (or an LLC taxes as a corporation). Legal services are an exception to the rule that you do not have to report payments made to corporations. Gross proceeds for settlement agreements or other payments to legal providers that are not for the attorney’s services should be reported on 1099-MISC instead.
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items
- Payments of rent to real estate agents or property managers, however, the real estate agent or property manager must use Form 1099-MISC to report the rent paid over to the property owner.
- Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, (such payments should be reported on Form 1099-K)
- Payments to a tax-exempt organization, including tax-exempt trusts; federal, state, and local governments; or a foreign government
What do I need to do differently as a business to comply with the 1099-NEC requirements?
If you don’t already, you should be separating your nonemployee compensation payments from all of your other 1099-MISC payments. If you do your 1099 preparations manually, keeping these nonemployee compensation payments separate will save time at the end of the tax year. If you use a Freelance Management System like Liquid, you should be able to easily download your 1099 data.
Then when the end of the 2020 tax year comes, you need to fill out Form 1099-NEC (instead of Form 1099-MISC) for all of the nonemployee compensation payments. For 2020, the IRS requires you to file Form 1099-NEC on or before February 1, 2021. This differs from the Form 1099-MISC filing deadlines: if you file on paper, you must file Form 1099-MISC by March 1, 2021; if you file electronically, you must file Form 1099-MISC by March 31, 2021.
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Category: Compliance Ask Liquid Finance and Accounting
Updated: August 11, 2020
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.