Form 1099-NEC pertains to reporting information relevant to non-employee compensation. It is not a replacement for Form 1099-MISC as the latter is now reserved for reporting information pertaining to independent contractor payments. Though this Form 1099-NEC has been in use since 1982, the IRS has revised it in 2020 to clear all the confusion pertaining to nonemployee expenses such as fees, prizes, awards, commissions, and other forms of compensation and services.
Payments that are Reported under 1099-NEC Tax Form
The Form 1099-NEC from the IRS is for businesses to report their non-employee compensation and for individuals who accept such compensation. Businesses should file the NEC form under the following conditions,
- To report payments made to someone who is not their employee
- Payments made for services in the course of their business or trade.
- Payments made by businesses to an individual, estate, partnership, or corporation.
- If the payments made to a payee exceeds $600 or more.
Examples of payments that an individual should report on the form 1099-NEC:
- Professional fees paid to attorneys and law firms, to architects, accountants, etc.
- Fees paid by one professional to another.
- Commission paid to non-employee salespeople
- Payments for parts or materials used to perform a service etc.
In any case, the form 1099-NEC should not be used to report any personal payments. It should be used only to make payments that pertain to a trade or business.
File Your1099-NEC Form
The IRS form 1099-NEC should be filed before January 31st, either physically or through an electronic filing method. Compensation should be reported on this form if the profits exceed $600 for the previous tax year. An online copy of this form should be downloaded from the IRS website. There are five key parts in the form 1099-NEC form that pertains to the following key aspects.
- Payer’s and recipient’s information – Includes the name, address, and taxpayer ID
- Non-employee compensation amount – This can be found in box 1 and should include the complete compensation for the previous tax year.
- Federal income tax withheld – This is reported in Box 4.
- State information and amount – If the state includes an income tax, then the total state tax payment amount for the year should be enclosed in box no 5.
Where and When to Send the Form 1099- NEC
The taxpayer should circulate multiple copies of the form 1099- NEC to the Internal revenue system, the state tax department, to the independent contractor and should also save in their business records. The form can be filed electronically and the mail is to be sent to the IRS. From the year 2021, the copies of the form 1099-NEC should be filed by January 31st, or on the next business day, if it falls on a weekend.
When it comes to reporting nonemployee compensation, the form NEC will completely replace box 7 on the form 1099- MISC. Form 1099- NEC is applicable for all independent contractors, self-employed contractors, and freelancers to report their income received for their job if the limit stays at $600 or beyond.