What is
Form 1099-NEC?

Updated July 13, 2020

Form 1099-NEC is the new IRS form starting in 2020, and it replaces Form 1099-MISC for reporting non-employee payments.

From 1099-NEC

The IRS has released the 2020 Form 1099-NEC to report non-employee payments. This move affects almost all businesses within the U.S. who need to report non-employee compensation. Up until now, Form 1099-MISC (box 7) was used to report non-employee compensation. But starting in 2020 tax year (to be filed in 2021), businesses will need to use form 1099-NEC to report non-employee compensation.

Why is 1099-NEC being reintroduced?

Form 1099-NEC is an old form, which was in use until 1982. It is now being reintroduced in 2020. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) eliminated the automatic 30-day filing extension. With this change in legislation, the IRS realized that if a business files a batch of 1099-MISC forms (some with an amount in box 7 and some without), after the January 31 deadline, it could mistakenly treat all forms as late and apply penalties. To resolve the issue, the IRS has reintroduced the Form 1099-NEC, effectively separating Box 7 (non-employee compensation) from the 1099-MISC.

What is non-employee compensation?

Non-employee compensation is the payment(s) a business makes to non-employee. For 1099-NEC, non-employee payments are reported only if:

  • It is paid to someone who is not an employee.
  • It is made for services in the course of your trade or business. Personal payments are not reportable.
  • It is made to an individual, partnership, estate, or corporation in some cases.
  • The payment is at least $600 for the calendar year.
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    Some examples of what is reported on form 1099-NEC:

  • You must issue a 1099-NEC for each person whom you have paid at least $600.
  • Service performed by someone who is not your employee, Professional service fees paid to an attorney, accountants, architects, etc.
  • You must also file 1099-NEC for each person from whom you have withheld any federal income tax (reported in box 4) under the backup withholding rules, even if the amount paid is less than $600.
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    However, not all payments made by businesses have to be reported on a 1099-NEC. There are some exceptions. Payments that are not reported on a Form 1099-NEC include:

  • Generally, payments to corporations (unless it is considered a "reportable payment" or payments to an attorney, who must receive a Form 1099-NEC, regardless of corporation status).
  • Salaries paid to an employee (reported on W-2s).
  • Payments to tax-exempt organizations in the United States, the District of Columbia, a U.S. possession, or a foreign government.
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    What to report on 1099-NEC?

    Here is a summary of what is reported on Form 1099-NEC:

    What To Report Amounts To Report
    Payments for services performed for a trade or business by people not treated as its employees (including payments reported pursuant to an election described in Regulations section 1.1471-4(d)(5)(i)(A) or reported as described in Regulations section 1.1471-4(d)(2)(iii)(A)). Examples: fees to subcontractors or directors and golden parachute payments. $600 or more

    For more information, please read the instructions for Form 1099-NEC.

    Exceptions to using 1099-NEC?

  • Don't use Form 1099-NEC to report the salary paid to an employee. To report salary paid to an employee, use Form W-2. It is essential that you accurately classify the payee as an employee or non-employee.
  • Don't use Form 1099-NEC to report any payments for non-business related or personal payments.
  • Don't use 1099-NEC to report gross proceeds to an attorney, instead use 1099-MISC.
  • Don't report payments for merchandise, phone, freight, storage, etc.
  • Don't report payment of rent to real estate agents or property managers (use Form 1099-MISC).
  • Don't report payments to a tax-exempt organization, tax-exempt trusts, federal, state, or local governments.
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    What goes on Form 1099-NEC?

    Use the following boxes to fill out Form 1099-NEC:

  • Box 1 to report nonemployee compensation.
  • Box 4 to report Federal income tax withheld.
  • Box 5 to report state tax withheld.
  • Box 7 to report state income if your state has an income tax.
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    Important Note:

    With the introduction of Form 1099-NEC, the non-employees compensations are not reported on Form 1099-MISC starting in 2020. However, if you are reporting non-employee compensation for previous years (2019, 2018, or 2017), you will still use 1099-MISC. Do not use form 1099-NEC for previous years.

    Form 1099-NEC due date:

    A business must file the 1099-NEC form with the IRS on paper or preferably electronically and must provide a statement to the contractor or individual receiving the payment. You are required to furnish the payee statement to recipients by January 31 (February 1 for 2021) and file with the IRS on either paper or electronically.

    Filing Type Due Date
    Recipient copy February 1, 2021
    IRS Paper Filing February 1, 2021
    IRS eFile February 1, 2021

    Check out 1099 deadlines for more information.

    Form 1099-NEC penalties:

    There are penalties associated with late filing for failure to file 1099-NEC. In addition to late filing penalties, there are other penalties, including failure to furnish correct payee statements, failure to file electronically, or fraudulent filing of 1099-NEC forms. Please find out more about penalties for non or late filing of 1099-NEC forms.

    These 1099-NEC penalties increase over time, so it is essential to file the forms as soon as possible if you miss the filing deadline. Please check out how to avoid 1099 filing penalties.

    What to do if you cannot file 1099-NEC before the due date?

    If you cannot file your 1099 forms by the due date, it is possible to get an extension to file 1099 forms. There are two types of extensions possible for 1099-NEC - extension for filing 1099 forms with the IRS, extension for providing recipient copies of 1099-NEC. Please find out Is it possible to get an extension to file 1099-NEC.

    What if you made an error in filing 1099-NEC?

    When you file a 1099-NEC, many things can go wrong. For example, you filed a wrong amount, used the wrong box, wrong payee or payer information, reported duplicate payments, or filed a 1099-NEC form by mistake. If you made any one of the errors while filing your form, it is possible to file a correction form to fix them. Find out How to correct 1099-NEC errors.

    What are the State filing requirements for 1099-NEC?

    You are encouraged to check with your state directly, as your state may have a filing requirement that you must follow. Employers may have to file with an individual state, and it is a smart idea to check that state’s tax law to find out if they must submit an equivalent form. At the publication of this docuemt, it is not clear if the IRS would make the Combined Federal State Filing Program (CF/SF) available for Form 1099-NEC. Find out more about Combined Federal and State Filing.

    Form 1099-NEC requires a team effort to be appropriately administered. Human resources must work with the corporate accounting and payroll departments to identify those needing to receive the form. If an employer has any concerns about how to calculate the reported payment or issue a Form 1099-NEC, he or she needs to consult accountants.

    Using a 1099-NEC service provider like eFile360 to file you 1099-NEC is recommended, as it can save you a lot of time and headaches.