Most small businesses and freelancers are familiar with Form 1099-MISC. In 2020, the IRS unveiled a new Form 1099-NEC for purposes of filing nonemployee compensation for any independent contractors, gig workers, or self-employed individuals not on payroll.
In an effort to avoid any confusion come filing time in January, it’s important to understand the difference between the two forms in advance. Here’s a brief overview of what you need to know to prepare.
If you paid at least $600 to any nonemployee service provider or vendor throughout the year, the IRS has moved all nonemployee compensation income reporting from its former location in Box 7 on Form 1099-MISC to its new home on Form 1099-NEC.
Below is additional guidance offered by the IRS as to what constitutes nonemployee compensation. You must file Form 1099-NEC if the following four criterions are met:
- Payment was made to someone who is not your employee.
- Payment was made for services in the course of your business or trade (also includes government agencies and nonprofit organizations).
- Payment was made to an individual, partnership, estate or, in some cases, a corporation.
- Payment was made in the amount of at least $600 during that year.
Please note that this single income type is the only payment information (besides corresponding withholding information) that will be reported on Form 1099-NEC. Other income types, such as rent or royalties, will remain on Form 1099-MISC for reporting purposes.
Payment types that should be reported on Form 1099-NEC include professional service fees, referral fees, commissions, or any other fees paid to a nonemployee. In this year of transition, the choice between which form to use for which type of payment could get confusing, so be sure to keep clear records and receipts for your tax professional to help you decide how to report certain payments.
With the introduction of Form 1099-NEC, this means that there is also a new 2020 Form 1099-MISC since the nonemployee compensation box was removed from the form. Besides some rearranging, no other major changes have been made to the updated 1099-MISC form.
Below are the new box numbers on revised Form 1099-MISC.
- Payer made direct sales of $5,000 or more (checkbox) in box 7.
- Crop insurance proceeds are reported in box 9.
- Gross proceeds to an attorney are reported in box 10.
- Section 409A deferrals are reported in box 12.
- Nonqualified deferred compensation income is reported in box 14.
- Boxes 15, 16, and 17 report state taxes withheld, state identification number, and amount of income earned in the state, respectively.
The deadline to file Form 1099-NEC is by January 31 or the next business day if that date falls on a weekend or a holiday. In 2021, January 31 falls on a Sunday, so Form 1099-NEC is due on Monday, February 1, 2021 by using either paper or electronic filing procedures.
Form 1099-MISC is due by March 1, 2021, if you use paper filing, or March 31, 2021, if you use electronic filing. Be sure to file on time to steer clear of any late penalties! Penalties range from $50 if you file within 30 days to $260 if you file on or after August 1.
To avoid a challenging filing experience after all of the legislative changes in 2020, let us help you navigate the tax landscape and streamline your reporting and planning this tax season.
If you’d like further clarification or would like help managing your 1099 reporting and tax filing requirements, contact me at stu@erocktax.com to schedule a conversation.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.