Form 1099-NEC doesn’t have to be confusing. Here are practical examples of using Form 1099-NEC.
If you need to catch up on what Form 1099-NEC is and how it changes Form 1099-MISC, read these first:
- What’s the New 1099-NEC for Non-Employee Compensation?
- How has Form 1099-MISC Changed with the Return of Form 1099-NEC?
- Form 1099-NEC: What Does It Mean For Your Business?
When to Use Form 1099-NEC
When You Pay Fees for Professional Services
When you pay for professional services, you will likely report this on Form 1099-NEC. This includes fees paid to attorneys – even when the law firm or individual is a corporation – as well as fees paid to accountants, architects, engineers, and consultants.
According to Sovos, you may create two 1099 forms for the same attorney for different legal services. These forms will likely have different numbers on them. When you work with an attorney for a specific litigation, you will report your payments on Form 1099-MISC in Box 10 Gross Proceeds Paid to an Attorney. If you use the same law firm for general purposes – including contract reviews and potential legal issues concerning your employees – you will report your payments on Form 1099-NEC.
When you pay for other services and part of the payment covered incidentals – the cost of parts or materials used to perform the services – you will complete Form 1099-NEC.
When You Pay Commission
If you have salespeople, you likely pay them a commission. If they do not repay this commission during the year, you will report the total payment on Form 1099-NEC.
If You Sold $5,000 or More in Consumer Products
According to the IRS, if your made direct “sales of $5,000 or more of consumer products to a person on a buy-sell, deposit-commission, or other commission basis for resale (by the buyer or any other person) anywhere other than in a permanent retail establishment,” you will enter an “X” in Box 7 of Form 1099-MISC. With this form, you may also need to complete Form 1099-NEC and report the sale again, but in number format.
If You Withheld Federal Income Taxes for Anyone
Under the backup withholding rules, you must file Form 1099-NEC for anyone from whom you have withheld federal income tax, regardless of the amount, even if it’s less than $600.
When Not to Use Form 1099-NEC
If You Made Personal Payments
Only use this form to report payments if you are in a trade or run a business for profit.
If You Made Payments Using a Third-Party
When you make payments with payment cards – such as debit, credit, or stored-value cards – or using a third-party payment network if the payment meets these minimum requirements:
- gross payments that exceed $20,000, AND
- more than 200 such transactions,
you will use Form 1099-K to report these payments.
If You Pay Rent
If you pay rent for your office, warehouse, or other business operations, you do not report those payments.
However, it’s important to note that the landlord, real estate agent, or property manager will report the rent income from you on Form 1099-MISC, so you will receive a copy of this form. If you provide services or property in lieu of rent, they will still report that income at the fair market value.
If You Made Payments to a Corporation
You do not report payments made to a corporation or an LLC that is treated as a C or S corporation.
If You Made Payments to Tax-Exempt Organizations
Do not report payments made to tax-exempt organizations, such as tax-exempt trusts; federal, state, local, and foreign governments; and private foundations.
If You Purchase Merch
Do not report payments for merchandise, telegrams, telephones, freight, storage, and similar items.
Avoiding common Form 1099-NEC mistakes can save your business time and money. If you have further questions, we recommend seeking out a professional accountant, for whom you’ll send a 1099-NEC next year.
Starting tax season 2020 in 2021, you may need to file Form 1099-NEC. E-file 1099-NEC forms with eFile360. Sign up for a free account here.