If you are an independent contractor or a client working with contractors, chances are you've heard about the new Form 1099-NEC. This is the tax form the Internal Revenue Service (IRS) introduced this year for reporting payments to non-employees and self-employed individuals.
If you want to know more about Form 1099-NEC and how it relates to Form 1099-MISC, you've come to the right place. We compiled an easy-to-read guide about the forms, their differences, how and when to file each.
What is Form 1099-NEC?
The new Form 1099-NEC (non-employee compensation) is not really new at all - this form was last used back in 1982, and the IRS reintroduced it this year. The 1099-NEC will be the exclusive form business taxpayers will use to report payments to independent contractors starting from the tax year 2020.
This means that Form 1099-NEC will replace box 7 on Form 1099-MISC, which is where clients used to report non-employee compensation. In short - if a client paid more than $600 within the calendar year to a non-employee, they must use Form 1099-NEC to report the payments.
The reason behind the change
Here's a bit of history and background: before 2015, the deadline for filing non-employee compensation forms, such as the 1099-MISC, was the end of February for paper filing and March 31st for electronic filing. Meanwhile, Form W-2, used to report employee compensation, was due on January 31st. This gap between deadlines meant that taxpayers could file taxes and get tax refunds before their non-employee income forms were even reported to the IRS. This, of course, led to taxpayers reporting lower compensation than what they actually earned.
Come 2015, and the IRS decides to enact the Protecting Americans from Tax Hikes Act (PATH Act). In the PATH Act, the underreporting problem was resolved by moving the deadline for filers to report non-employee compensation to January 31st, aligning it with the deadline for Form W-2.
However, other business payments (such as rent) were still stuck on the old deadline of February 28th or March 31st. In turn, this misalignment meant that employers had to issue multiple 1099-MISC forms in different deadlines, making everyone involved - the IRS, the taxpayers, and business owners - incredibly confused.
Finally, in 2020, the IRS decided to put a stop to all the confusion and reintroduce Form 1099-NEC for reporting non-employee compensation payments only.
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Does Form 1099-MISC still exist?
Form 1099-MISC is the tax form used to report miscellaneous income. It went through a redesign in 2020 to remove non-employee compensation from its scope, but it still exists.
The most significant change to Form 1099-MISC is in box 7, which was previously used to report independent contractor payments. In the redesigned version, however, box 7 serves for reporting direct sales of consumer products worth $5,000 or more aimed for resale.
Who needs to file Form 1099-NEC?
If your company, as a client, paid an independent contractor more than $600 during the year, you will be required to file the new Form 1099-NEC. The reportable payments need to be made in the course of your trade or business. Here are some examples of payments you need to report on the 1099-NEC:
- Professional service fees to architects, designers, accountants, software engineers, attorneys, and law firms
- Fees paid by one professional to another
- Commissions to non-employee salespeople that are subject to repayment but haven't been repaid in the course of the year
You do not file this form for employees since they have the dedicated Form W-2 for reporting their salaries. You also don't file the 1099-NEC for independent contractors registered as a C corporation or an S corporation.
You do need to file Form 1099-NEC for each individual you have withheld federal income tax for under the backup withholding rules, no matter how much you paid them.
Who needs to file Form 1099-MISC?
According to the IRS, you use Form 1099-MISC if you paid more than $600 during a calendar year to an individual or company for:
- Rent payments (unless you pay them to real estate agents or property managers)
- Prizes and awards
- Other income payments
- Cash from a notional principal contract to an individual, a partnership, or an estate.
- Fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney
- Section 409A deferrals
- Nonqualified deferred compensation
- Gross proceeds paid to an attorney
Same as with Form 1099-NEC, you are obliged to file Form 1099-MISC for each person you have withheld federal income tax for under the backup withholding rules regardless of the payment amount.
How to file Form 1099-NEC
Filing the 1099-NEC is the responsibility of the payer. All that payees need to do is provide:
- For US residents: Form W-9 (Request for Taxpayer Identification Number), which enables them to report independent contractor payments. The contractors report their income via a Schedule C form.
- For non-US residents: Form W-8BEN or W-8BEN-E 9 (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting), which enables them to prove they reside outside of the United States.
The clients, on the other hand, need to obtain the said Form W-9 or Form W-8BEN(E) from their contractors and then proceed with filing Form 1099-NEC with the IRS. There are two copies that payers file: Copy A, which is for the IRS, and Copy B, which is for the contractor. If applicable, you can mail one copy to the state tax department and keep one for your records.
Filing the form can be done either through mail or through an e-file. If you want to submit the form through the mail, you need to request a physical copy from the IRS first, which you can do on their website. Then, you need to add Form 1096, which summarizes the other forms, as a cover page before filing.
Electronic filing is done with IRS's Filing Information Returns Electronically (FIRE) system. To register with FIRE, you need to request a Transmitter Control Code (TCC), which you do by mailing Form 4419 to the IRS. Make sure to submit Form 4419 at least 30 days before the due date for submitting Form 1099-NEC.
Filing electronically is way easier and quicker than doing it by mail. Depending on which state you are in, you can benefit from states participating in the FIRE system, which means you won't have to file separately.
Filing deadline for 1099-NEC and 1099-MISC
The deadline for filing your Form 1099-NEC and Form 1099-MISC to the IRS for the prior year is January 31st. If that happens not to be a business day, the deadline moves to the next business day. The same deadlines apply to delivering a Copy B to the service provider since they will need it for their tax returns.
Don't forget to check your state filing requirements for 1099 forms. Some states, such as Florida, Nevada, New York, Texas, and Washington, ensure that the IRS forwards them relevant electronically filed forms.
The penalties for missing the deadline to submit Form 1099-NEC and 1099-MISC vary and grow depending on how late you are. If you file the forms within the first 30 days after the deadline, the fine will be $50 and increase to $100 if you file before August 1st. However, if you happen to file on or after August 1st, the penalty is $260. If you can't make it on time, it's best to ask for an extension - do this by submitting Form 8809.
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