Businesses that make payments to independent contractors need to be aware of a change in 1099 reporting forms. Starting with the 2020 tax year, business taxpayers must report nonemployee compensation of more than $600 on new Form 1099-NEC instead of Form 1099-MISC. It’s important to note that Form 1099-NEC does not replace Form 1099-MISC, which is still used to report other types of payments made. Form 1099-NEC is technically not a new form; the IRS last used it in 1982 before making the change to Form 1099-MISC for reporting all forms of payments to nonemployees.
Why the Change?
Since 1982, Form 1099-MISC has been used as an all-in-one form for reporting nonemployee compensation along with other payments and miscellaneous income; including rents, royalties, prizes and awards, Section 409A deferrals, and nonqualified deferred compensation. This presented some confusion for business taxpayers because of the varying reporting deadline for different forms of payments. Nonemployee compensation has to be reported by January 31, while other payments don’t.
The IRS revived Form 1099-NEC to remove that confusion because it is now the only form for reporting nonemployee compensation. All other miscellaneous payments are still reported on 1099-MISC.
No Changes to Nonemployee Compensation Reporting
Except for the change of form, requirements for reporting nonemployee compensation do not change. Form 1099-NEC must be completed for any payments made to a nonemployee for services provided in the course of your trade or business. The nonemployee recipient may be an individual, partnership, estate, or corporation.
Form 1099 NEC will also be used to report federal income taxes withheld under the backup withholding rules regardless of the amount paid out during the year.
Nonemployee compensation may consist of fees, commissions and other forms of compensation for services performed. Form 1099-NEC payments can also include professional service fees (attorneys, accountants, contractors, etc.), referral or fee-splitting fees paid by one professional to another, and payment for services; including payments for parts or materials used to perform the services.
All of these forms of nonemployee compensation are to be reported in Box 1 of Form 1099-NEC.
If You are Self-Employed
If you are self-employed, you will receive Form 1099-NEC if you received $600 or more for services beginning with the 2020 tax year. As with Form 1099-MISC, you can expect to receive these forms by January 31st of each year. Compensation reported in Box 1 of Form 1099-NEC is subject to self-employment taxes. Any other miscellaneous payments you receive that are not reportable on Form 1099-NEC should still be reported on Form 1099-MISC.
With the 1099-NEC filing date rapidly approaching, now is the time to get your questions answered. Please don’t hesitate to contact a Glass Jacobson advisor to discuss your particular situation.