What Is Form 1099-NEC for Nonemployee Compensation?
It replaces Form 1099-MISC for reporting non-employee payments
The IRS has revived an old form—the 1099-NEC—for reporting nonemployee compensation for the 2020 tax year (to be filed in 2021). Here’s what to know about the new 2020 Form 1099-NEC, plus when to use it and what happens to Form 1099-MISC.
The 2020 Form 1099-MISC and the 2020 Form 1099-NEC are to be used for reporting payments made in 2020 during the 2021 tax season. Do not use these forms for reporting 2019 payments during the 2020 tax season. Use the 2019 version of Form 1099-MISC to report 2019 payments to nonemployees.
This new 1099-NEC form for 2020 is actually an old form that hasn’t been in use since 1982. The IRS has separated out the reporting of payments to nonemployees from Form 1099-MISC —where it was reported in Box 7—and they have also redesigned Form 1099-MISC for 2020 reporting.
What Is Nonemployee Compensation?
It may sound obvious that nonemployee compensation is the payment(s) your business makes to nonemployees, but it’s more complicated than that. For the purposes of reporting nonemployee compensation on Form 1099-NEC, the IRS explains that payment must be reported if all four of these conditions are met:
- It is made to someone who is not your employee
- It is made for services in the course of your trade or business
- It was made to an individual, partnership, estate, or, in some cases, a corporation
- The payments made to that payee were at least $600 or more for the year
Some examples of payments you must report on Form 1099-NEC include:
- Professional service fees to attorneys (including law firms established as corporations), accountants, architects, etc.
- Fees paid by one professional to another (fee-splitting, for example)
- Payments for services including payment for parts or materials used to perform the services if they were incidental to the service
- Commissions paid to nonemployee salespeople not repaid during the 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.
For a complete list of examples, see the 2020 instructions for Forms 1099-MISC and 1099-NEC.
Exceptions to Using Form 1099-NEC
Don’t use Form 1099-NEC to report personal payments. It’s only to be used for payments if you are in a trade or business for profit.
Don’t use Form 1099-NEC to report payments to employees. Use Form W-2 to report that. If you aren’t sure if a payee is an employee or nonemployee, take the time to understand the difference and whether you should be working with 1099-MISC (now 1099-NEC) or W-2 forms. You might also not have to report business travel allowances you paid to employees on Form 1099-MISC or 1099-NEC, though these may be reportable on Form W-2.
Don’t report gross proceeds to an attorney (not fees) on the 1099-NEC. Instead, use the 2020 1099-MISC form.
Other common exceptions include:
- Payments for merchandise, telegrams, phone, freight, storage, or similar items
- Payments of rent to real estate agents or property managers (use Form 1099-MISC)
- Payments to a tax-exempt organization, including tax-exempt trusts; federal, state, and local governments; or a foreign government
What Are the Parts of Form 1099-NEC?
There are several parts to the Form 1099-NEC.
- Payer’s information: Name, address, and taxpayer ID
- Recipient’s information: Name, address, and taxpayer ID
- Box 1: For nonemployee compensation if you paid this person $600 or more during the year
- Box 4: For any federal income tax withheld, though it’s not usual to withhold income taxes for nonemployee payments unless you have received a backup withholding order for that person
- State information: If your state has an income tax, include the total payment amount to that person for the year and any state tax you withheld
Be sure that the recipient’s taxpayer ID is correct. You must have a Form W-9 from each recipient with the person’s taxpayer ID on it before you complete Form 1099-NEC.
You may also need to include a checkmark for the FATCA (Foreign Account Tax Compliance Act) filing requirement for assets held in foreign countries.
Filing and Submitting Form 1099-NEC
Form 1099-NEC must be given to nonemployees by January 31, the year after the reporting year. For example, you must give 2020 forms by Feb. 1, 2021 (because Jan. 31, 2021, is a Sunday). The forms must be filed with the IRS before Feb. 1, 2021, using either paper or electronic filing. If you file electronically, you’ll need to use the IRS FIRE system.
What About Form 1099-MISC for 2020?
Because nonemployee payment reporting has been removed from Form 1099-MISC for 2020 and the foreseeable future, the IRS has redesigned Form 1099-MISC. The biggest change is Box 7, which was previously used for reporting nonemployee payments and is now used for direct sales of $5,000 or more. Other information on the form has been reassigned to different box numbers.
The Bottom Line
The new 1099-NEC form for 2020 is not complicated, but figuring out who must receive it may be difficult. Though you won’t need to send it out to your nonemployees until 2021, consider working with a tax professional or a payroll processing service before doing so.
Internal Revenue Service. "Form 1099-NEC. Prior Year Products." Accessed Jan. 14, 2020.
Internal Revenue Service. "2019 Instructions for Form 1099-MISC." Accessed Jan. 14, 2020.
Internal Revenue Service. "2020 Instructions for Forms 099-MISC and 1099-NEC." Box 1: Nonemployee Compensation, Page 10. Accessed Jan. 14, 2020.
Internal Revenue Service. "2020 Instructions for Forms 099-MISC and 1099-NEC." Exceptions, Pages 2–7. Accessed Jan. 14, 2020.
Internal Revenue Service. "2020 Instructions for Forms 099-MISC and 1099-NEC." Redesigned Form 1099-MISC, Page 1. Accessed Jan. 14, 2020.
Internal Revenue Service. "2020 Form 1099-NEC." Accessed Jan. 14, 2020.
Internal Revenue Service. "2020 Form 1099-NEC." Instructions to Payer. Page 8. Accessed Jan. 14, 2020.
Internal Revenue Service. "2020 instructions for Forms 099-MISC and 1099-NEC." Filing dates, Page 1. Accessed Jan. 14, 2020.