What Is IRS Form 1099-NEC? How It Works for small business owners
If you’re not familiar with Form 1099-NEC then don’t worry, you’re not the only one. Form 1099-NEC hasn’t been around for the last 38-years and has only recently made a comeback for the 2020 tax year. So, what is Form 1099-NEC and what do you need to know about it?
What is Form 1099-NEC?
Form 1099-NEC is what business owners should now use to report nonemployee compensation as opposed to Form 1099-MISC which has been used for the past few decades to report nonemployee compensation. Nonemployee compensation includes payment types such as fees, commissions, prizes, awards, and any other forms of compensation for services to independent contractors.
When Do You Need To Fill Out Form 1099-NEC?
If you’re still not sure what counts, then basically if you, as a business owner made a payment for services in the course of your trade or business to an individual who is not your employee or You made the payment to an individual, a partnership, an estate, or a corporation and the payments to the payee were at least $600 during the year, then you need to report these payments. If you pay an independent contractor nonemployee compensation, separate nonemployee compensation payments from all of your other Form 1099-MISC payments. You should also fill out Form 1099-NEC if you have any workers you paid $600 or more to in nonemployee compensation.
What Information Do You Need To Fill Out Form 1099-NEC?
The information you need when filling out Form 1099-NEC is your name, address, and phone number, your Taxpayer Identification Number (TIN), the recipient’s name, address, and TIN, the amount total for the nonemployee compensation, and the amount of federal and state income tax withheld (if applicable). If you need more information and help with this, then you can have a look at the IRS’s website which has detailed 1099-NEC instructions available.
Where do you send Form 1099-NEC?
Just as with Form 1099-MISC, you need to file your Form 1099-NEC in multiple places. You will need to have Copy A which goes to The IRS, Copy 1 which goes to the State tax department, if applicable, then Copy B will go to the Independent contractor and Copy 2 will also go to the Independent contractor, and finally, you will need Copy C to keep in your own business records for your reference.
What Is The Difference Between Form 1099-MISC and Form 1099-NEC?
Form 1099-MISC is used for reporting payments and Miscellaneous Income and is needed for each person you have paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest, or at least $600 in rent, prizes and awards, cash from a notional principal contract to an individual, a partnership, or an estate, medical and health care payments, payments to an attorney, any fishing boat proceeds, crop insurance proceeds, Section 409A deferrals, nonqualified deferred compensation, or any other income payments during the last tax year.
Form 1099-MISC should not be used for W-2 employees and as of the tax year 2020, it should also not be used to report independent contractor payments as that’s what Form 1099-NEC is for.
When it comes to Form 1099-NEC this is a form that solely reports nonemployee compensation and it is not a replacement for Form 1099-MISC. Form 1099-NEC only replaces the use of Form 1099-MISC for reporting independent contractor payments.
Why is the IRS bringing back Form 1099-NEC?
As mentioned, Form 1099-NEC was used in the past, but it hasn’t been in use now for 38 years. So, why is it now making a comeback? Well, it goes back to 2015 when the Protecting Americans from Tax Hikes Act (PATH Act) was brought in. Before this, taxpayers could file one Form 1099-MISC to report nonemployee compensation and miscellaneous income items by February 28 each year, however, one the PATH Act came in the due date was changed to January 31 for reporting nonemployee compensation, however, the date had stayed the same for the miscellaneous income. This meant that taxpayers had to use two forms 2099 and had to separate nonemployee compensation. Understandably, this caused a lot of confusion for business owners and taxpayers, as well as for the IRS who made a lot of mistakes and treated forms that came in after the January 31 deadline as late returns. To stop this confusion and to make things simpler for everyone, the IRS brought back Form 1099-NEC to separate nonemployee expenses.
How Do You File Form 1099-NEC?
Luckily there is more than one way to file Form 1099-NEC and probably the easiest way to do it is electronically. You can file your form 1099-NEC on the IRS’s FIRE system and by doing this, files are processed faster with fewer errors. The FIRE System can also accept multiple files for the same type of return. However, if you want to file electronically then you need to have the software or a service provider that will create the file in the proper format as a scanned or PDF copy will not be accepted. Additionally, a Transmitter Control Code (TCC) is required to transmit information returns through the FIRE System. The other option is to mail your Form 1099-NEC to the IRS, however, where you mail it to depends on the state you live in, so make sure you check that you have the right address.
When is the Form 1099-NEC deadline?
Starting this year in 2021, you are required to send copies of Form 1099-NEC to workers you paid nonemployee compensation to during the year by January 31 or if this date falls on a weekend, then you’ll need to have it to your recipients by the next business day. You will also need to file Copy A with the IRS by January 31 each year.
As a taxpayer, you should know all the risks involved in delaying payment in your taxes and the processes in case this happens. It would be best if you asked the right questions and put the necessary measures in place to avoid having any problems.
Getting help with form 1099-NEC
It is never a good idea to approach complex financial decisions without sound advice from a team who really understand the choices you’re weighing. That is why Anthem Tax Services is here, to give you the resources to reach the best possible understanding with the IRS. If you are in need of help with form 1099-NEC, contact us today by phone (1-888-548-0478) or email.