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One of the most important updates for taxpayers in 2020 came with the reintroduction of the Form 1099-NEC. IRS retired this form way back in 1982, but it was renewed this year in order to replace one use of the Form 1099-MISC Box 7- the one relating to the nonemployee compensation. Regardless if you are a taxpayer or payee, take some time to go through all of these updates and changes. This is especially important for every business hiring independent contractors, freelancers, and for everyone who is self-employed.
What was IRS Form 1099-MISC used for?
Since "MISC" stands for miscellaneous income, it is quite understandable that this form had several uses. There are various boxes for any amount higher than $600 dollars that were spent on rent, attorney, medicare and healthcare payments, and a lot more. One of the uses of this form was to report any nonemployee compensations.
This was filed under Box 7, and clients were required to issue one to all of their payees, provided they have paid them $600 or more in a calendar year. This form was used for any type of work that wasn't done by an employee. Let's say that you own a restaurant. You would use a standard W-2 for your cooks, waiters, cleaning staff... But, if you have an accountant working out of their own firm, or if you hired a graphic designer to do your logo, you were required to file Form 1099-MISC as a payer.
Why did the IRS decide to replace Form 1099-MISC for nonemployee compensation?
Although Form 1099-MISC was detailed enough for you to file all of your miscellaneous income, the issue was with the due dates. Form 1099-MISC had two due dates - the end of February if you are filing by mail, and March 31st if you are filing electronically, for the previous tax year.
It is important to note that if you had more than 250 Form 1099-MISC to file, you were obligated to use efile. Luckily, the Internal Revenue Service now uses FIRE - Filing Information Returns Electronically. Since the COVID pandemic broke out, many businesses opted for using this system, and according to the IRS guidance, you can do that even if you have less than 250 forms.
However, these dates weren't aligned with another important form. The filing deadline for Form W-2, which is used to report employee compensations was the end of January. This very wide, two-month gap meant that the employee compensation was reported, filled and the tax on them returned before you could even report nonemployee compensation. This system not only caused a lot of confusion for filers but also created a lot of room for manipulation. This was especially the case with the fraudulent credit claims for the earned income tax credit - EIRC.
The first step the IRS took was in 2015, with the Protecting Americans from Tax Hikes Act (PATH Act). They moved the deadline for just Box 7 to January as well, but that meant that the taxpayers had to report the same Form twice, with a different deadline.
So, in the end, the best solution was to "introduce" the new Form 1099-NEC.
What are the differences between IRS Form 1099-MISC and Form 1099-NEC?
When it comes to reporting nonemployee compensation, as of 2020, the Form 1099-NEC will completely replace Box 7 on the Form 1099-MISC. Both forms have the same purpose, although the filing is a little different.
What is important to mention, however, is that Form 1099-MISC will still be used to report payments and get a tax return for 2019. So, if you are filing for taxes in that calendar year, have that in mind. You won't use the Form 1099-NEC until January 2021.
Box 7 in the Form 1099-MISC will be used in the future to report direct sales in the amount of no less than $5000.
If you want to get into the nitty-gritty details, we wrote a separate article on the differences between Form 1099-MISC and Form 1099-NEC.
In which cases do you still need to use IRS Form 1099-MISC?
The renewed Form 1099-NEC is only used for nonemployee compensation, meaning it only replaces Box 7 on the Miscellaneous income form. Everything else is still filled under the same Form 1099-MISC. That means that rents, attorney fees, crop insurance proceeds, proceeds from a fishing boat, the state earned income, etc, and many more, are still filled under this form.
You can get the full list of incomes on the IRS website, so make sure to check it. In addition, to this you can consult your tax specialist, or a CPA, to get a more detailed overview.
Who needs to use IRS Form 1099-NEC?
The Form 1099-NEC is used by businesses acting as clients for reporting payments they made for work done by anyone who isn't their employee. This umbrella term - nonemployee compensation - stands for every independent contractor, freelancer, and any other self-employed individual who performed any kind of service for the taxpayer. The limit stayed the same - $600.
This means that any payment to someone who isn't on your workforce, not your employee, and not on your payroll, needs to appear on this form. It is made for services in the course of your trade or business. It is also used for commissions made to nonemployee salespeople.
This type of work is usually contract-based and in relation to a specific time-bound project or a particular, recurring assignment.
You should also have in mind that his form can be issued not only to individuals but also to partnerships, estates, or corporations.
In addition to this, clients are required to fill out this form for any service provider for whom they withheld federal income tax under backup withholding rules. In this case, the total amount can be less than the $600 limit.
Are there any exceptions to 1099-NEC I should know about?
There are a few misconceptions and common errors when it comes to filing Form 1099-NEC.
First of all, if your independent contractor is registered as a C corporation or an S corporation, you are not required to fill out this form.
Then, you should never file a Form 1099-NEC for your employees. The mistake of classifying your employee as an independent contractor is a common one, but a mistake nevertheless. IRS doesn't take these cases lightly, so make sure you aren't misclassifying anyone that works for you.
Another important rule that often gets broken is about filing personal payments under this form. Any professional service fees filled under this form need to be performed to a client that is a company or an organization, not an individual.
A common mistake is filling attorney fees and gross proceeds under this form since they are someone who is providing you with a service but they are not your employee. However, they are a special category and they are still filled under Form 1099-MISC.
How to fill the IRS Form 1099-NEC
Service providers, as payees, are required to provide their clients with a Form W-9, stating their name, address, and most importantly their taxpayer identification number. All of that data is necessary to fill out the tax forms.
Every Form 1099-NEC is filled by the taxpayer for the prior year, at the beginning of the following one. Once the client has the W-9 they can fill out the form, that needs to have two copies - Copy A and Copy B.
The taxpayer is required to file Copy A to the IRS while providing their independent contractor with Copy B. It is not the responsibility of the payee to file this form, but of the payer. However, the service provider needs to have a copy, in order to file that income on their own tax records, under Schedule C.
When is the deadline to sent 1099-NEC?
Form 1099-NEC should be distributed to the independent contractors by January 31. However, in 2021, the due date for 1099-NEC is February 1, because January 31 falls on a Sunday.
What are the fines for missing a filing deadline for Form 1099-NEC?
If you miss the filing deadline, you are required to pay a fine. Fines can go from $50 to $260, depending on how late you were. If you require a fling extension, you can request it by filling Form 8809 to the IRS.