The IRS has reintroduced Form 1099-NEC as the new way to report self-employment income instead of Form 1099-MISC as traditionally had been used. This was done to help clarify the various filing deadlines for Form 1099-MISC versus the 1099-NEC filing deadline. The 1099-NEC form will be used starting with the 2020 tax year.
• The IRS requires businesses to report payment of nonemployee compensation of $600 or more on Form 1099-NEC instead of on Form 1099-MISC.
• Businesses also need to file Form 1099-NEC if the business withholds federal income tax from a nonemployee’s compensation, regardless of the amount of the payment.
• If you are self-employed and a business paid you $600 or more for nonemployee compensation, you should receive Form 1099-NEC by January 31 and use it to prepare your tax return.
• Nonemployee compensation can include receipt of fees, benefits, commissions, prizes, and awards for services performed by a nonemployee.
What is Form 1099-NEC?
Beginning with the 2020 tax year, the IRS requires businesses to report nonemployee compensation on Form 1099-NEC instead of on Form 1099-MISC. Businesses will use this form if they made payments totaling $600 or more to certain nonemployees, such as an independent contractor.
If you are self-employed:
- You can expect to receive this new form from a business that paid you $600 or more for nonemployee compensation in tax year 2020 or later.
- You should receive these forms by January 31 each year and use them to prepare your tax return.
Why did the IRS reintroduce 1099-NEC?
Before its reintroduction, the last time form 1099-NEC was used was back in 1982. Since then, prior to tax year 2020, businesses typically filed Form 1099-MISC to report payments totaling $600 or more to a nonemployee for certain payments from a trade or business. These payments generally represent nonemployee compensation and, up until now, would typically appear in box 7 of 1099-MISC.
In order to help clarify the separate the various filing deadlines when reporting different types of payments on Form 1099-MISC, the IRS decided to reintroduce Form 1099-NEC which has a single filing deadline for all payments that use the form.
What is nonemployee compensation?
The IRS explains that, in general, you have to report payments you make if they meet the following four conditions:
- The payment is made to someone who isn't your employee
- The payment is made for services in the course of your trade or business
- The payment is made to an individual, partnership, estate, or in some cases a corporation
- The payment total is at least $600 for the year
Additionally, businesses will need to file Form 1099-NEC if the business has withheld any federal income tax under the backup withholding rules regardless of the amount of payments for the year to the nonemployee.
Nonemployee compensation can include:
- 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 isn't your employee
TurboTax Tip: Personal payments that aren't made as compensation related to the company’s trade or business wouldn't typically be reported on Form 1099-MISC.
What details do I need to know about the 1099-NEC form update?
Self-employed individuals shouldn't see personal payments made to them during the year on the new form. Instead, your form should only report payments made as compensation related to the company’s trade or business.
- The nonemployee compensation reported in Box 1 of Form 1099-NEC is generally reported as self-employment income and is usually subject to self-employment tax.
- Payments from your trade or business to individuals that aren't reportable on the 1099-NEC form, would typically be reported on Form 1099-MISC.
The IRS provides a more comprehensive list of the types of payments that would be reported in Box 1.
Some examples include:
- Commissions paid to nonemployee salespeople that are subject to repayment but not repaid during the year
- Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, etc.
- Fees paid by one professional to another, such as fee-splitting or referral fees
- Payments by attorneys to witnesses or experts in legal adjudication
- Payment for services, including payments for parts or materials used to perform the services
Who needs to file Form 1099-NEC?
Any trade or business that makes nonemployee compensation payments totaling $600 or more to at least one payee or withholds federal income tax from a nonemployee’s payment regardless of the amount of the payment, will the 1099-NEC form to report those payments and withholdings.
Generally, payers need to file these forms by January 31 and have no automatic 30-day extensions to file unless the business meets certain hardship conditions.
What about Form 1099-MISC?
Because the IRS removed reporting for nonemployee compensation from Form 1099-MISC for tax year 2020 and onward, the IRS redesigned that form as well.
- The biggest adjustment comes to Box 7, which previously reported nonemployee compensation but now reports direct sales of $5,000 or more.
- Other information reported on the form will now show in renumbered boxes.
What if I receive a 1099-NEC and W-2?
If you earn income from various sources–for example, if you’re a full-time worker as well as a freelancer–you may receive both a 1099-NEC and a W-2. If this is your first year receiving both forms, you may be confused about how to proceed with filing.
When you have both a W-2 and a 1099-NEC, you’ll include income from both forms when filling out Form 1040. The income from both of these sources will be used to determine your tax liability, but you can still include deductions for business expenses as a self-employed individual.
Speaking of tax liability, when you earn nonemployee compensation, you’re typically expected to make estimated tax payments throughout the year. However, you could increase your withholdings on your W-2 instead.
Before doing this, it’s important to consider whether you’re confident you can estimate your expected tax liability for your nonemployee compensation fairly accurately. If the answer is no, then it might not be the best route.
A tax professional can help you get more clarity on whether increasing your W-2 withholdings or paying estimated quarterly taxes is better suited to your circumstances.
What if a business fails to meet the 1099-NEC deadline?
If your business fails to issue a 1099-NEC to the IRS and the applicable state tax departments by the deadline–on or before January 31–you may have to pay a penalty.
What if I don’t receive my 1099-NEC in time to file?
If the business you’ve provided services to fails to send you your 1099-NEC before the tax filing deadline, you should report your nonemployee compensation to the best of your ability. Under-reporting or inaccurately reporting your tax liability may result in a penalty.
To help you ensure you’re prepared for tax season, it’s always recommended to keep records of all nonemployee compensation you’ve received throughout the year.
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