1099-NEC or 1099-MISC and What Has Changed
Non-employee compensation reporting has been removed from Form 1099-MISC for the 2020 tax season and beyond. The IRS has redesigned the Form 1099-MISC and revived a new version of the 1099-NEC.
What was previously reported on Box 7 of the 1099-MISC, the new 1099-NEC will now capture any payments to non-employee services providers, such as independent contractors, freelancers, consultants, and other self-employed individuals. To use this new form, it is crucial that you understand what is considered non-employee compensation:
- Payment must be made to someone who is not an employee
- Payment must be made for services related to the business
- Payment must be made to an individual, partnership, or estate
- Payments must meet or exceed $600 during the calendar year
Payments for merchandise, telegrams, phone, freight, or similar items are exceptions to this, as well as payments to tax-exempt organizations/trusts or payments made to federal, state, and local governments. Complete instructions for both the 1099-NEC and 1099-MISC can be found on the IRS website.
Good news…the new 1099-NEC is straightforward: Box 1 is for non-employee compensation and Box 4 is for federal withholdings (if applicable). Simply put, the income that the company used to report in the 1099-MISC Box 7 will now be reported in 1099-NEC Box 1.
- Do not use 1099-NEC to report gross proceeds to any attorney (for example: settlement agreements or other legal payments that are not for the attorney’s service) – use 1099-MISC instead
- Do use 1099-NEC to report attorney fees for services
- Do not use 1099-NEC to report rent payments to real estate agents property managers – use 1099-MISC instead
The biggest change to the 1099-MISC is Box 7, which was previously used for reporting non-employee compensation.
- Report gross proceeds to an attorney (not fees) on Form 1099-MISC
- Complete a 1099-MISC if you made royalty payments of at least $10 during the year
- Use Form 1099-MISC for miscellaneous income, such as rents, royalties, and medical and health care payments
The Big Picture
You must file Form 1099-MISC or 1099-NEC for anyone from whom you withheld federal income tax under the backup withholding rules, regardless of the amount – this means that having a W-9 for all recipients is crucial. Both the 1099-NEC and 1099-MISC must be distributed to all recipients and filed with the IRS by January 31st (Feb 1st in 2021, since Jan 31st falls on a Sunday). The best way to ensure this process remains smooth is to request a W-9 from all vendors, service providers, or consultants before any payments are made to them. Additionally, many businesses will no longer be able to submit paper forms. For tax year 2020, the electronic filing threshold is 100 forms. Which means any business with 100 forms or more are required to e-file.
Authors: Vera Bruursema and Kathryn A. Sisson, CPA, MST
Sign Up for Our Newsletter
Want to keep up-to-date on what's happening at Melanson and in the accounting world? Our newsletter offers tips and tricks for planning and preparation all year long.