Form 1099-MISC has been redesigned due to the creation of Form 1099-NEC. Beginning with tax year 2020, employers will no longer report nonemployee compensation, such as payments to independent contractors on Form 1099-MISC. Contractor payments made in 2020 and beyond will be reported on the new form 1099-NEC.
What is Form 1099-NEC?
The 1099-NEC is a new form specifically for reporting non-employee compensation—currently defined as payments to individuals on a contract basis to complete a project or assignment and not on payroll. This would include all independent contractors, gig workers, or self-employed individuals who previously had their payments reported in box 7 of a 1099-MISC form.
PLEASE NOTE: 1099-NEC is NOT for employees. Employees will need to have a Form W-2 submitted to report wages, tips, and other compensation paid during the tax year. There are significant penalties for misclassifying employees as contractors. Click here to read our blog post on the differences between the two before submitting a 1099-NEC.
Who requires a Form 1099-NEC?
If the following four conditions are met, you must generally report a payment as nonemployee compensation:
You made the payment to someone who is not your employee.
You made the payment for services rendered in the course of your trade or business (including government agencies and nonprofit organizations).
You made the payment to an individual, a partnership, an estate or, in some cases, a corporation.
You made payments to the payee of at least $600 during the year.
If your business paid a contractor more than $600 in a tax year, you’re required to file Form 1099-NEC with the IRS and send a copy to the contractor by January 31st of the following year (February 1 in 2021, since January 31 falls on a Sunday). If January 31 does not fall on a business day, the due date will be moved to the next business day.
Check your bookkeeping records and confirm the total amount that was paid to each contractor over the course of the tax year. Include fees, commissions, prizes and awards for services performed as a nonemployee and other forms of compensation for services performed.
Only include payments made in the course of your trade or business. Personal payments are not reportable.
The following are some examples of payments that will need to be reported on a 1099-NEC
Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.
Fees paid by one professional to another, such as fee-splitting or referral fees.
Payments by attorneys to witnesses or experts in legal adjudication.
Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service.
Commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year.
A fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to the payer, if the fee and reimbursement total at least $600.
Payments to nonemployee entertainers for services.
Independent contractors registered as a C corporation or S corporation do not need to be issued a 1099-NEC. This information can be found on the contractor’s Form W-9.
Who requires a Form 1099-MISC?
Each person to whom you have paid the following in the course of your business during the year:
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
At least $600 in the following:
Prizes and awards
Other income payments
Any fishing boat proceeds
Medical and health care payments
Crop insurance proceeds
Payments to an attorney
Section 409A deferrals
Nonqualified deferred compensation
Employers must furnish the Form 1099-MISC to the recipient by January 31. Employers must also file with the IRS by March 1, 2021, if you file on paper, or March 31, 2021, if you file electronically.
Some payments do not have to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which a Form 1099-MISC is not required include:
Payments to a corporation (including a limited liability company (LLC) that is treated as a C or S corporation).
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.
As a business owner, make sure you request a Form W-9
This will include their:
Legal name or business name if applicable
Business entity (sole proprietor, partnership, corporation)
Taxpayer identification number (SSN, ITIN, or EIN)
It is the responsibility of the payer to file the Form 1099-NEC/ 1099-MISC and the form will provide you with all the information you need to fill out any 1099 form.
What are the penalties for missing the filing deadline?
If you missed the deadline, you will pay a penalty per return or statement depending on how late the payment is. These penalties are:
$50 if you file within 30 days
$110 if you file more than 30 days late, but before August 1
$270 if you file on or after August 1
$550 if the IRS classifies your non filing as Intentional Disregard
The amount will be determined based on when you file the correct information return. If you are unable to file on time, you can request an extension by submitting Form 8809 to the IRS. However, you will still need to supply the 1099-NEC forms to any contractors by January 31.
Book an online consultation here or call now at 404-449-1528 if you have any business or tax related questions! At Credence Tax Services LLC, we are always happy to serve you!