Understanding Tax Form 1099 and the new 1099-NEC

Starting with the 2020 tax year, the IRS has reintroduced tax Form 1099-NEC. The IRS made these changes to bring clarity to deadlines for reporting self-employment income. In the past, 1099-MISC has been used. This means starting this year, businesses will need to report nonemployee compensation on Form 1099-NEC, if they paid someone like an independent contractor more than $600 throughout the tax year. This can be a one-time payment of more than $600 or a combination of smaller payments that add up to more than $600 throughout the year. If you were paid more than $600 by a business, you should expect to receive your form by January 31st (February 1st in 2021).

When do you need to use a 1099-NEC?

The IRS outlines that you will need to complete a 1099-NEC when all four of the following conditions are met:

  • Make a payment to someone other than an employee (employee payments are reported on Form W-2, not a Form 1099);
  • Payment is made to an individual, partnership, estate, or corporation;
  • Payment is made during the course of your trade or business; and
  • Payment is $600 or more (can be a one-time payment or multiple payments throughout the year if they total more than $600).

In previous years, these types of payments would have been reported in Box 7 of Form 1099-MISC as nonemployee compensation. Nonemployee compensation can include payments of many types including fees, commissions, benefits, prizes and awards, and other types of payments. Now, this nonemployee compensation will be reported in Box 1 of Form 1099-NEC.

Examples of the type of nonemployee compensation reported on the form includes:

  • Fees include funds paid from one professional to another such as referral fees or fee-splitting;
  • Payments to independent contractors, for example rideshare drivers (Uber® and LYFT®), some delivery drivers, and many others;
  • Commissions paid to nonemployee salespeople such as real estate agents, insurance agents, and others;
  • Professional service fees including legal, accountant, architect, contractor, and other fees;
  • Service payments for parts and materials used to perform services; and
  • Attorney payments to cover the cost of witnesses or experts for trials.

Businesses will need to use 1099-NEC to report other types of payments too, including if they pay someone $10 or more in royalties or if the business withheld any federal income tax. Other types of personal payments will continue to be reported on Form 1099-MISC. If you need to complete and file a 1099-NEC, you can view the IRS’ detailed instructions for this form here.

When will you get a 1099-NEC?

If you received any of the payments listed above, you should have received a 1099-NEC by February 1st in 2021. If you are an independent contractor, you should receive Form 1099-NEC instead of Form 1099-MISC. This includes freelance work, driving for DoorDash® or LYFT®, or completing work as an independent contractor. Other than the name of the company, your name and address, and the amount you were paid in Box 1, there will not be a lot more information reported on this form. However, you will need this information to complete your tax return. Although there are boxes on Form 1099-NEC to report federal and state tax withheld, for most taxpayers these boxes will be empty unless you are subject to back-up withholding.

The income reported on Form 1099-NEC is reported to the IRS too. Therefore, it is really important that the information reported on this form matches the information you report on your tax return. If you do receive a 1099-NEC with incorrect information, you should contact the company and ask them to provide you with a corrected copy of your form.

Income reported on Form 1099-NEC is subject to self-employment tax. Instead of having estimated taxes withheld from each paycheck like employees, who receive a Form W-2, self-employed individuals should make quarterly estimated tax payments to the IRS. By making these payments four times a year, this will help you avoid paying interest and penalties and receiving a huge tax bill when you file your tax return.

If you do not receive a 1099-NEC but received these types of payments, you are still responsible for reporting all income received to the IRS on your tax return.

When do you need to use Form 1099-MISC?

Since the IRS moved nonemployee compensation to 1099-NEC starting for the 2020 tax year, the IRS revamped Form 1099-MISC too. The biggest change made by the IRS is to Box 7. Now that it is no longer needed to report nonemployee compensation, Box 7 is used to report direct sales of $5,000 or more.

Form 1099-MISC will continue to be used to report rents, royalties, prizes and awards, crop insurance proceeds, and other types of determinable income. If you need to complete Form 1099-MISC, you can view the instructions provided by the IRS here. If you receive Form 1099-MISC like Form 1099-NEC, you will need to report the income on your tax return.

The Bottom Line

The 1099-NEC is the new form used to report nonemployee compensation related to a company’s trade or business. It is not used to report personal payments, like rents, prizes and rewards, or crop insurance proceeds, which will still be reported on Form 1099-MISC. Nonemployee compensation includes payments to independent contractors, professional fees, and commissions. The main reason for the change was to ensure taxpayers receive their 1099-NEC by mid-February. Companies are required to mail it by February 1st in 2021. If you need to complete a 1099-NEC or 1099-MISC or file one on your tax return, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group. They will make sure your tax return and necessary documents are filed correctly.