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When Should Businesses Use Tax Form 1099-NEC Instead of 1099-MISC?

Many small businesses rely on independent contractors either instead of, or in addition to, W2 employees. If you pay independent contractors to provide services for your company, be aware that your business has tax filing requirements – even if you do not withhold income tax from contractors’ pay. In most cases, nonemployee compensation will be reported for tax year 2020 using IRS Form 1099-NEC Nonemployee Compensation.

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What is Form 1099-NEC?

In previous tax years, small business owners who paid independent contractors for services met their tax reporting obligations by reporting those payments using box 7 of IRS Form 1099-MISC.

Form 1099-NEC is not a new form, but it was last used in 1982, so many of today’s small business owners are unfamiliar with it. This form was reintroduced in 2020 as a way for businesses to report nonemployee compensation, separate from other types of payments reported on Form 1099-MISC.

What is the difference between Form 1099-NEC and Form 1099-MISC?

Some businesses will need to file both 1099-NEC and 1099-MISC forms. It is important to understand the differences. The primary change is that, instead of reporting nonemployee compensation on Form 1099-MISC, such payments should now be reported on Form 1099-NEC.

Nonemployee compensation reported on Form 1099-NEC may include payment for services, including parts or materials, professional service fees, referral fees, commissions, benefits, prizes and awards for services by a nonemployee, and other types of compensation paid to nonemployees.

1099-MISC is used to report other types of payments. You will use this form if you paid someone at least ten dollars in royalty payments, or if you paid them $600 or more in 2020 for rents, prizes and awards, medical and health care payments, deferred compensation plan payments, and other less common payments like fishing boat proceeds or crop insurance proceeds. 1099-MISC is also used to report federal income tax under the backup withholding rules, of any amount.

Who needs to file Form 1099-NEC?

If your business paid an independent contractor $600 or more during 2020 for services, you are required to prepare and file Form 1099-NEC, and to provide a copy of the form to the independent contractor.

In general, you will use Form 1099-NEC if: 

  • You paid someone who is not an employee for services related to your trade or business, 
  • Payments during the year totaled $600 or more, and 
  • Payment was made to an individual, a partnership, an estate, or a corporation.

How do I file Form 1099-NEC?

You will need several key pieces of information in order to prepare Form 1099-NEC. These include: 

  • Your business’s information (as payor), including its legal name, employer identification number (EIN), and address. 
  • The recipient’s name, address, and Social Security number or tax identification number. 
  • The total amount of nonemployee compensation paid to the recipient in 2020. 
  • Federal income tax withheld (if any). 
  • State information.

Small businesses may, and are encouraged to, file Form 1099-NEC electronically with the IRS rather than filing paper copies. To do so, you can use the Filing Information Returns Electronically (FIRE) system.

Is Form 1099-NEC part of the combined Federal and State program?

Under the IRS combined Federal/State filing program, information reported to the IRS on several types of tax and payroll forms is automatically shared with state tax authorities. Unfortunately, IRS Publication 1220 makes it clear that Form 1099-NEC will not be included in the combined Federal/State filing program.

This means that if your state has a reporting/filing requirement for the information included in Form 1099-NEC, you must make a separate filing by the state deadline, which may differ from the federal deadline.

Plan Now to Meet Your Business’s Tax Form Filing Deadlines

Regardless whether your workers are classified as employees or independent contractors, the federal filing deadline for 2020 employee W2s and independent contractor 1099-NEC forms is February 1, 2021.

Beginning the data-gathering and verification process as early as possible can help you meet your obligations to workers and to the IRS. As previously mentioned, your company may also be subject to state-specific requirements and deadlines, so consult with a tax professional in your state or a Rocket Lawyer On Call® attorney to understand your obligations with respect to Form 1099-NEC.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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