Form 1099-NEC or nonemployee compensation 1099 makes a comeback in 2020 after a 38-year hiatus. Employers and business owners used Form 1099-MISC for the past few decades to report nonemployee compensation. This time around, they could now welcome the revived and revamped 1099-NEC form.
What is form 1099-NEC? What is a 1099-NEC form used for? Why and where to file the form? This article answers these questions giving you knowledge about the IRS requirements for non-employee compensations with your business.
What is 1099-NEC?
Let us first answer the question: What is form 1099-NEC? For starters, 1099 forms are federal income tax forms for businesses used to report financial transactions over the course of a tax year. Meanwhile, NEC stands for nonemployee compensation. This means Form 1099-NEC allows employers to report payments made to nonemployees or independent contractors.
Specifically, you use the form to report someone's earnings that do not include wages, salary, or tips (which you report on a Form W-2 meant for employees). The 1099 forms were allocated for independent contractors.
Non-employee compensation 1099 typically reports fees, commissions, prizes, and awards to nonemployees $600 or more. Employers need to file 1099-NEC with the Internal Revenue Service (IRS) and send copies to all recipients by January 31, generally.
Form 1099-NEC also reports any federal income tax withheld under the backup withholding rules.
Is This A New Form?
Answering the question "Is the nonemployee compensation 1099 form a new form?" requires us to take a little history lesson. The 1099-NEC dates back to 1982, when it was last used. This makes it an old form, but the IRS brought it back to use in 2020 to simplify payment reports to nonemployees.
Therefore, the answer to the question is both a yes and a no. After the IRS discontinued 1099-NEC in 1982, Form 1099-MISC became the main form where employers need to report non-employee compensations. However, due to the tax law Protecting Americans from Tax Hikes (PATH) Act that aims to protect taxpayers against fraud, the 1099-MISC became an ineffective document.
The PATH Act made different sections of the form due at different times, making it a troublesome means of reporting. Box 7 on the miscellaneous form became due by January 31, while the rest of the form became due by February 28 for paper filing and March 31 for electronics filing.
In the revived 1099-NEC form, the amount reported in Box 7 (nonemployee compensation) would go in Box 1. Bringing back the old, discontinued nonemployee compensation 1099 became the best solution to create a better process. This eliminated errors when submitting two 1099-MISC forms at different times. Employers would only have to use one form or the other.
Which Form Should You Select? / Do I Need To File A 1099-NEC?
If you pay a nonemployee, such as independent contractors, on behalf of their business, at least $600 for services, goods, or even legal fees, then you would need to file a 1099-NEC. This amount could include fees, commissions, bonuses, and even benefits.
You should file a nonemployee compensation 1099 form for each individual paid $600 or more during the year if:
- An employer pays an individual not in their employ, such as an independent contractor, for services performed. This could include materials utilized to perform the services or payments for parts; or
- A business owner purchases fish or other aquatic life using cash payments from anyone engaged in the business or trade of catching fish; or
- An individual makes a payment to an attorney for their legal services in the course of a trade or business.
Typically, you would need to report a payment as nonemployee compensation if it meets all the following conditions:
- You make a payment to an individual not employed in your company or business.
- The payment covers services in the course of your trade or business.
- You make the payment to an individual, partnership, estate, or corporation.
- The payee receives payment of at least $600 during the year.
If you withheld any federal income tax (regardless of the total amount paid out) as part of the backup withholding rules, or make a payment of at least $10 in royalties, then you would still need to file a 1099-NEC.
Who Requires a Form 1099-NEC?
If a business owner paid an independent contractor $600 or more during a tax year, they need to file Form 1099-NEC. However, a nonemployee compensation 1099 form would not be required if the contractor were registered as an S corporation or C corporation, which can be determined on the contractor's Form W-9.
You do not need to file a 1099-NEC for their employees. Employees are required to file a Form W-2 to report their wages, tips, and other compensation earned during a tax year. You could find yourself with significant penalties if you misclassify employees as contractors.
If a business owner pays an LLC or an individual $600 or more during the tax year in rent, legal settlements, awards, or prize winnings, they need to file a 1099-MISC.
Where Do You Send Form 1099-NEC
When filing Form 1099-NEC, you should be aware of where to file them. Like the Form 1099-MISC, employers need to file multiple copies of the nonemployee compensation 1099.
Each Form 1099-NEC requires two copies, Copy A and Copy B, which need to be filled out with the same information. If an employer hires an independent contractor and pays $600 or more in a year, they must report all payments in that year.
Copy A would go to the IRS, Copy 1 to the state tax department (if applicable), Copy B and Copy 2 goes to the contractor, while Copy C should be stored for record-keeping purposes. The independent contractor receiving Copy B does not have the responsibility to file Form 1099-NEC.
You could also file Form 1099-NEC electronically or through mail to the IRS, depending on which state your business mainly operates.
In some places, employers are also required to file nonemployee compensation 1099 with the state. Alaska, Florida, Illinois, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming do not require employers to submit 1099 forms.
What Do You Include on Form 1099-NEC?
Employers should request a filled-out Form W-9 from newly hired independent contractors to fill out Form 1099-NEC. When filling out Form 1099-NEC, you should 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)
Additionally, Form W-9 should include the contractors:
- Legal name or business name if applicable
- A business entity (sole proprietor, partnership, corporation)
- Current address
- Taxpayer identification number (SSN, ITIN, or EIN)
The responsibility of filing nonemployee compensation 1099 falls on the payer. Check bookkeeping records to confirm the total amount of payments made to each contractor over a tax year and finish filling out the form.
There are seven unnumbered boxes on the left side of the 1099 form. These boxes require you to input information about you as the payer and recipient (the contractor you paid during the year). There are also seven numbered boxes on the right where you enter amounts.
Box 1: Nonemployee Compensation – You need to report all payments you gave to a nonemployee during a year. An independent contractor uses the amount entered in Box 1 to file their income tax return.
Box 2: Direct Sales – Box 2 is simply a checkbox for if you made any direct sales of $5,000 or more of consumer products for resale, buy-sell, deposit-commission, or any other basis. If you did make a direct sale, put an "X" in the checkbox.
Box 3: (Empty) – According to the IRS, Box 3 is reserved for future use and is currently left empty.
Box 4: Withheld Federal Income Tax – If you withheld taxes from nonemployee compensations under backup withholding, you would need to fill out this box with the amount withheld.
Box 5: State Tax Withheld – If you withhold state income taxes from a contractor's payments, you need to report the amount in Box 5.
Box 6: State/Payer's State No. – Enter the abbreviated name of the state and the state identification number where you withheld the state tax.
Box 7: State Income – Enter the amount of the state income in Box 7 of the nonemployee compensation 1099.
You do not need to fill out Boxes 5 to 7 on the copy you send to the IRS, as these boxes are for the recipient and state only.
When is the Form 1099-NEC Deadline?
Although the miscellaneous 1099 form or 1099-MISC is still in use, contractor payments made by employers in 2020 and the succeeding years would need to be reported on the Form 1099-NEC. Starting 2021, the new nonemployee compensation due date is on January 31. However, if it falls on a weekend, the due date moves to the next business day.
In 2021, January 31 lands on a Sunday, which means the new nonemployee compensation 1099 form moves to the following Monday on February 1.
Meanwhile, 1099-MISC is still due on March 1 if filing by paper or March 31 if filed electronically. If these dates do not land on business days, their due dates also move to the next business day.
If you need to ask for an extension, there is no guarantee that you would receive it. Employers are still expected to submit 1099-NEC following the deadline unless prevented by a natural disaster, a severe injury, or by death.
Now that we have answered the questions “What is Form 1099-NEC?” and “What is a 1099-NEC form used for?” you should have a good grasp of the idea of the 1099 form. It is always good to study these kinds of forms for the benefit of your business.
The confusion brought about by the 1099-MISC form prompted the IRS to revive and reintroduce the revamped Form 1099-NEC, also known as nonemployee compensation 1099. Although the miscellaneous form is still in use by businesses, independent contractor payments made by employers are now reported on Form 1099-NEC.
Using the 1099-NEC allows business owners to report nonemployee compensation without the trouble of filing on different dates. The form makes it easier and less complicated to file. Take a few minutes to get to know Form 1099-NEC and its requirements so your business functions smoothly without fear of penalties.