Background
The 1099-NEC (Nonemployee Compensation) is a form revived by the IRS in 2020. The form had been retired back in 1982, but was brought back by the IRS in 2020 for reporting of nonemployee compensation. The redesigned 2020 form is, predictably, an expanded version.
Why?
Before the Protecting Americans from Tax Hikes Act, or PATH Act, of 2015, taxpayers were able to file Form 1099-MISC to report both nonemployee compensation and miscellaneous income. Nonemployee compensation includes money paid to someone for work or services, while miscellaneous income can include royalties, broker payments, fees, rents, prizes and awards, medical or health care payments, and more. The deadline for filing the 1099-MISC was February 28.
The PATH Act
The PATH Act was created to protect taxpayers against fraud. The Act includes new laws to reduce fraud as well as extending existing laws on the verge of expiring. It also provides for closer monitoring of tax credits, such as the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). Anyone claiming one of these credits will have to wait until February 15 to receive a refund from the IRS.
After the PATH Act was passed, the due date for reporting nonemployee compensation was changed to January 31 (or the next business day if January 31 is a Saturday or Sunday). What followed was taxpayers reporting nonemployee compensation and miscellaneous income items by filing two separate 1099-MISC forms. This was confusing to not only the taxpayers and the IRS but to the IRS computer system as well. The computers were unable to manage the two different due dates for Form 1099-MISC, resulting in the IRS inadvertently treating some of the forms received after January 31 as late returns although they were not.
So, the 1099-NEC was brought back to eliminate this confusion.
When does an individual or business need to file a 1099-NEC?
Any individual or entity that operates as a business and makes payments to non-employees (such as an independent contractor) will need to submit a 1099-NEC form. Employee earnings are reported on Form W-2.
A taxpayer meeting these four conditions must file a 1099-NEC:
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The taxpayer compensates someone who is not an employee.
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This compensation is made for services for the taxpayer’s trade or business.
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The compensation goes to an individual, partnership, estate or corporation.
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Payments made to the recipient were $600 or more in a year.
These payments can include compensation for services (including payment for parts or materials used in providing the services), fees (such as those paid to an accountant or attorney), commissions, prizes, awards, and so on.
Completing a 1099-NEC
The 1099-NEC contains five basic parts:
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The payer’s name, address, and phone number
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The payer’s Tax Identification Number (TIN)
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The recipient’s name, address, and TIN
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The total amount of nonemployee compensation paid to recipient
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Federal and state income taxes withheld (if applicable)
The employer needs to file Copy A of the form with the IRS by January 31 (e-file is acceptable) and send a copy of Form 1099-NEC to anyone receiving nonemployee compensation by January 31 (or the next business day, which will be February 1 in 2021).
However, it’s important to note that the payer needs to file a 1099-NEC only if the amount of compensation is $600 or more. The IRS provides a list of types of payments that need to be reported in Box 1 of the 1099-NEC.
Taxpayers using the Form 1099-MISC going forward will see some changes there, too. Removing nonemployee compensation from reporting meant the 1099-MISC had to be redesigned and renumbered. Box 7 no longer addresses nonemployee compensation but provides a field to report direct sales amounting to $5000 or more.
Getting it right
Misclassifying an employee as an independent contractor can lead to serious and expensive consequences, landing the payor in hot water with both the IRS and Department of Labor and opening a business up for potential lawsuits. It’s important to get it right, and this starts with the 1099-NEC. If you have questions or concerns, reach out to SMC Innovations for assistance.