Businesses and contractors will see a new form in their tax documents this year. Last used in 1982, Form 1099-NEC is returning to make it easier for the IRS to report nonemployee compensation separately from employee compensation. The new Form 1099-NEC is solely for reporting nonemployee compensation.
What Is Form 1099-NEC?
Until the early 1980s, the IRS required any compensation paid to nonemployees to be reported on a separate form, called Form 1099-NEC. Starting in 1983, though, a box was included for nonemployee compensation on Form 1099-MISC. For the 2019 tax year, nonemployee compensation was Box 7 on Form 1099-MISC, but you’ll notice there is no longer a space for it on that form.
To report nonemployee compensation, employers will need to use Form 1099-NEC, which was mandated under the PATH Act. This act moved up the date for reporting nonemployee compensation to the IRS. Instead of filing it by February 28, as you did in the past, you’ll now have to file Form 1099-NEC by February 1 each year.
Read More: How Does a 1099 Form Work?
What Is Nonemployee Compensation?
Business owners have to report all wages they pay to workers during the tax year. Decades ago, this applied primarily to salaried and hourly employees who were on the payroll. Employers take Social Security and Medicare taxes out of each check those employees receive, and the employer must use a W-2 Form to report wages and taxes withheld. This helps determine whether the taxpayer will owe money or get a refund from the IRS.
But these days, not all payees of a business are W-2 employees. Some employees are what the IRS calls 1099 workers. These workers are considered self-employed and, even if they do all their work for the same employer, are not classified as employees. The employer must claim all wages paid to these employees.
The new Form 1099-NEC is solely for reporting nonemployee compensation.
Who Is a Nonemployee?
Contractors give businesses the freedom to bring workers in as needed rather than committing to a long-term pay arrangement. But the IRS has strict rules when it comes to classifying workers as independent contractors. If you’re claiming workers who then have to pay their own self-employment tax on their tax return, make sure you would pass the following test under audit:
- Do your independent contractors have the freedom to work whenever and wherever they want?
- Does the contractor control how the work gets done, with you focusing solely on the end result?
- Did the employee undergo very little training to do the work, instead relying on existing knowledge?
- Does the contractor pay his or her own expenses?
- Is the contractor required to use his or her own equipment to perform the work?
- Is the did contractor pay a fee per job versus a salary or hourly wage?
If you answer “No” to any of the above questions, think twice before classifying that worker as a nonemployee. Misclassifying an employee as a contractor can make you responsible for paying employment taxes on that worker. You’ll need to be able to demonstrate a reasonable basis for classifying the worker as a contractor.
When Is 1099-NEC Required?
Anyone running a business will need to take a close look at the individuals they pay throughout the year. If you paid a service provider $600 or more during the tax year, and you did not take Social Security and Medicare taxes out of that pay, you’ll need to file a 1099-NEC to report that payment.
But individuals aren’t the only ones who merit a 1099-NEC. If you paid a partnership or estate $600 or more for services during the tax year, a 1099-NEC will apply. In some cases, you’ll even have to report income paid to a corporation that provides services to your business.
Deadline to File Form 1099-NEC
It’s important to pay attention to the filing deadline for Form 1099-NEC since it’s earlier than the one you had if you reported nonemployee compensation in the past. You’ll need to file the form either on paper or electronically by February 1, 2021. If you’re mailing the form, having it postmarked by February 1 will suffice. In 2021, February 1 falls on a Monday, but in later years, if it falls on a weekend or holiday, it will be due the next business day.
Extensions of Time to File
In most cases, you’ll need to have your 1099-NEC on its way to the IRS by February 1. However, there are some circumstances where you can apply for a 30-day extension to file your 1099-NEC. You’ll request this using Form 8809: Application for Extension of Time to File Information Returns.
To qualify for a 30-day extension for filing Form 1099-NEC, you’ll need to meet one of the following requirements:
- You suffered a catastrophic event in an area that was declared a federal disaster area.
- Your operations were affected by a fire, casualty or natural disaster.
- You or the person who files your forms experienced a serious illness, or your filer suffered a death or unexpected absence.
- This was the first year of your establishment.
- You did not receive the information you needed to file Form 1099-NEC in time.
Using Form 2020-MISC
The return of Form 1099-NEC doesn’t do away with Form 1099-MISC. You’ll still complete Form 1099-MISC. You’ll just no longer report your contractor compensation on it. You’ll need to complete 1099-MISC if your business paid anyone at least $10 in royalties or at least $600 in one of the following categories:
- Prizes and awards
- Other income payments
- Cash from a notional principal contract to an individual, a partnership or an estate
- Any fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney
- Section 409A deferrals
- Nonqualified deferred compensation
Read More: Who Receives a Form 1099-Misc?
Filing Taxes as a Contractor
Independent contractors have already grown accustomed to receiving a 1099 in the mail at tax time. This year, though, it will be a 1099-NEC instead of a 1099-MISC. If you aren’t having taxes taken out on your earnings by an employer, you’ll receive a 1099-NEC while your friends are receiving W-2 forms in their mailboxes.
Employers have a $600 minimum for reporting payments, but your minimum is actually $400, and that’s overall, not per client. So if you made $400 or more in the most recent tax year, at tax time you’ll need to complete Schedule C (Form 1040) and report your earnings for the year. You’ll be responsible for paying the full 15.3 percent tax on your earnings to cover Social Security and Medicare. This is known as the self-employment tax.
But the good news is, as an independent contractor, you can claim business costs as deductions. You can claim your computer, take the home office deduction, list any unreimbursed expenses and deduct all office supplies. This will reduce the amount of income you pay taxes on each year.
As more employers opt to use independent contractors over-committing to W-2 employees, Form 1099-NEC will become more popular than ever. By splitting out contractor compensation from other types of nonemployee compensation, businesses can easier track how much they’re spending each year on contractors versus attorney’s fees and royalties.
- Accounting Today: IRS Revives Form 1099-NEC for Nonemployee Compensation
- IRS.gov: 2021 Form 1099-NEC
- IRS.gov: Instructions for Forms 1099-MISC and 1099-NEC (2020)
- IRS.gov: Am I Required to File a Form 1099 or Other Information Return?
- IRS.gov: Understanding Employee vs. Contractor Designation
- IRS.gov: General Instructions for Certain Information Returns (2020)
- IRS.gov: Form 8809 Application for Extension of Time To File Information Returns
- Business News Daily: Self-Employed? Everything You Need to Know About Taxes
- Internal Revenue Service. "About Form 1099-MISC." Accessed Jan. 15, 2020.
- Internal Revenue Service. "Am I Required to File a Form 1099 or Other Information Return?" Accessed Jan. 15, 2020.
- Internal Revenue Service. "2019 Instructions for Form 1099-MISC," Page 1. Accessed Jan. 15, 2020.
- Internal revenue Service. "2019 Form 1099-MISC," Pages 1–2. Accessed Jan. 15, 2020.
- Internal revenue Service. "2019 Form 1099-MISC," Pages 1–7. Accessed Jan. 15, 2020.
- Internal Revenue Service. "Form 1099-MISC." Accessed Jan. 29, 2020.
- Internal Revenue Service. "Instructions for Forms 1099-MISC and 1099-NEC (2020)." Accessed Jan. 15, 2020.
- Internal Revenue Service. "2019 General Instructions for Certain Information Returns," Pages 25–27. Accessed Jan. 15, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.