Accounting & Tax Tips

January 25, 2021

IRS Reintroduces Form 1099-NEC for Non-Employees

Prior to 2020, if your small business hired independent contractors, you issued a 1099-MISC Form to report nonemployee compensation. For the tax year 2020, the IRS has reintroduced Form 1099-NEC (NEC stands for Non-Employee Compensation) to replace 1099-MISC. This critical form needs to be filed by January 31, 2021, by any company that has independent contractors or paid a third party for services that are not on a business payroll.

Why Was Tax Form 1099-NEC Reintroduced?

The last time form 1099-NEC was used was in the early 1980s. Until tax year 2020, businesses typically filed Form 1099-MISC, Box 7 to report payments totaling $600 or more to a non-employee for certain payments from businesses. To help clarify the separate filing deadlines when reporting different types of payments on Form 1099-MISC, the IRS has reintroduced Form 1099-NEC which has a single filing deadline for all payments that use the form. The 1099-MISC Form still can be used for other paid royalties, rents, and other rewards.

What Is Considered Non-Employee Compensation?

According to the IRS, you must report business payments made to non-employees if they meet the following conditions:

  1. The payment total is at least $600 for the tax year.
  2. The payment is made to someone who is not an employee on your payroll.
  3. The payment is made for business services.
  4. The payment is made to an individual, partnership, or estate.

Nonemployee compensation can include:

  • Fees
  • Benefits
  • Commissions
  • Prizes and awards for services performed by a nonemployee.
  • Other forms of compensation for services performed for your trade or business. by an individual who is not your employee.

Examples of nonemployee compensation include payments to independent contractors, fees paid for professional services such as attorneys and accountants, and commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year.

You must also file Form 1099-NEC for anyone from whom you withheld federal income tax under backup withholding rules for any amount, even if it’s less than $600.

Automatic Filing Extension No Longer Available

There are also changes to the automatic 30-day extension if you need to file 1099s and W-2s late. Automatic 30-day extensions to file Form 1099-NEC are no longer available. According to the IRS: “However, an extension to file may be available under certain hardship conditions. Also, nonemployee compensation may be subject to backup withholding if a payee has not provided a taxpayer identification number to the payer or the IRS notifies the payer that the Taxpayer Identification Number provided was incorrect.”

Overview of Form 1099-NEC

Here is a look at the reissued 1099-NEC Form and its key areas.

Download the complete 1099-NEC Form and access Instructions for Form 1099-MISC and Form 1099-NEC

We are happy to discuss how this may impact your Accounting, Bookkeeping, and/or Business Tax Planning.

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