The IRS has introduced Form 1099-NEC for the 2020 tax year, making a distinction between payments to non-employees and other types of miscellaneous payments a business might make. The form doesn't replace Form 1099-MISC. It just separates payments made to non-employees onto this different form for reporting purposes.
Non-employees should receive Form 1099-NEC rather than Form 1099-MISC beginning in 2020.
The information you'll need for this form will come from your business records for nonemployee payments to each person or business you paid more than $600 during the year for services.
Who Should Receive Form 1099-NEC?
NEC stands for "non-employee compensation," and Form 1099-NEC includes information on payments you made during the previous calendar year to non-employees. You must send a 1099-NEC form to any non-employees to whom you paid $600 or more during the year.
The 1099-NEC is used for independent contractors who are self-employed individuals and do work for you, but not for corporations or employees.
A non-employee differs from an employee in that the non-employee is an independent entity who is self-employed. Non-employees also include people in professions, subcontractors, or others who offer their services to the general public. The IRS sets the definitions of employees and independent contractors, depending on several factors.
Check with your tax professional if you have any doubts about whether someone is an employee or a non-employee, or file Form SS-8 to ask the IRS to make the determination for you.
Form 1099-NEC vs. 1099-MISC
Form 1099-NEC is reserved for individuals who provide you with services but who don't work for you as an employee. It's also used for attorneys under some circumstances, and for anyone from whom you purchase fish or "other aquatic life," but only if you make the purchase with cash and the individual is someone whose business is catching fish.
Form 1099-MISC is still in use for the 2020 tax year and beyond, but it no longer includes non-employee compensation. It reports payments such as rents, prizes and awards, medical and health care payments, non-qualified deferred compensation, consumer goods for resale, and royalties—basically miscellaneous payments to anyone who isn't an independent contractor.
Nonemployees should receive FORM 1099-NEC rather than Form 1099-MISC beginning in 2020 and going forward.
Taxpayer ID Numbers for Form 1099-NEC
You must have a valid tax ID number for a non-employee before you prepare Form 1099-NEC. When you hire a non-employee, you must get a W-9 form from them reporting this and other identifying information you'll need to complete Form 1099-NEC. Document your efforts to obtain a completed W-9 form by keeping notes of the attempts you made, including emails and mailings.
You can file the 1099-NEC using zeros in the space where the taxpayer ID is required if the individual simply won't give you the number. You might want to reconsider using their services and paying them going forward.
Double-check the taxpayer ID numbers provided to you by non-employees to avoid issues with the IRS. The agency provides an Online Taxpayer ID Matching program to help you ensure that the numbers are correct. The program requires signup.
How to Complete Form 1099-NEC
You'll have to include information about your business for each 1099-NEC you prepare, including:
- Your federal employer ID number
- Your business name
- Your business address
Enter the recipient's taxpayer ID number (Social Security number, employer ID number, or federal tax ID number) along with all your own business information in the boxes provided on the left side of the page. Each is clearly marked as to what you should enter there.
Next enter information regarding the payments you've made to the non-employee in the appropriate box:
- Box 1: This tells the non-employee and the IRS the total of how much you paid the individual during the tax year.
- Box 4: You normally wouldn't withhold taxes from payments made to non-employees, but some individuals can be subject to backup withholding, and this would obligate you to do so. You might receive a notice from the IRS telling you that this payee must pay backup withholding. The non-employee is required to certify in Part II of Form W-9 that they are not subject to backup withholding. Enter any amount of backup withholding you've made in Box 4.
- Boxes 5, 6, and 7: The IRS doesn't require that you fill in these boxes, but your state's department of taxation might require a copy of the Form 1099-NEC with this information. Enter the person's state income, any state taxes you might have withheld, and identify the state or states to which you'll be reporting. Complete an additional 1099-NEC for this information if you must enter data for more than two states because the form only accommodates two.
Check with your tax professional if you must account for backup withholding to be sure you're entering it correctly.
Where to Get Form 1099-NEC
You can get 1099-NEC forms from office supply stores, directly from the IRS, from your accountant, or using business tax software programs. You can't use a form that you download from the internet for Form 1099-NEC because the red ink on Copy A is special and can't be copied. You must use the official form.
Due Dates for 1099-NEC Forms
Forms 1099-NEC must be filed with the IRS by January 31 for the previous calendar year. This deadline is the same for both paper filing and e-filing. The exact date may change for a year to the next business day if January 31 falls on a weekend or holiday.
You may be subject to late filing penalties if you submit 1099-NEC forms after the due dates. The amount of the penalty is determined by how late you file and the size of your business. Using a payroll service provider doesn't relieve you of the responsibility to ensure that the 1099 forms are filed correctly and on time.
The penalty is at least $100 for each form with no maximum if your failure to file is found to be intentional.
If You Make an Error
Check for errors before you submit the forms to the IRS. Common errors in completing 1099 forms include using the form for the wrong year, sending the form to the wrong person or company, and failing to include all requested information.
You can simply correct the error if you make a mistake in completing a 1099-NEC form and if you discover it before you submit the form to the IRS. Otherwise, you must submit a corrected 1099-NEC form. Check the "corrected" box at the top of the new form and be sure to change Form 1096 if the correction affects your totals on this transmittal form.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.