There is a new Form 1099-NEC, Nonemployee Compensation for business taxpayers who pay or receive nonemployee compensation. Starting in tax year 2020, payers must complete this form to report any payment of $600 or more to a payee.
The new 1099-NEC (NEC stands for Non-Employee Compensation) is based on an old form that has been out of use since 1982. To use the “reinstated” 1099-NEC properly, you need to understand what is considered nonemployee compensation. Previously reported on Box 7 of the 1099-MISC, the new 1099-NEC will capture any payments to nonemployee service providers, such as independent contractors, freelancers, vendors, consultants and other self-employed individuals (commonly referred to as 1099 workers).
According to the IRS, a combination of these four conditions distinguishes a reportable payment:
✓ It is made to someone who is not your employee.
✓ It is made for services in the course of your trade or business.
✓ It was made to an individual, partnership, estate, or, in some cases, a corporation.
✓ Payments were $600 or more for the calendar year.
Filing and Submitting Form 1099-NEC
✓Distribute to recipients by January 31. (For 2021, the date is Feb. 1, since Jan. 31 falls on a Sunday).
✓ File with the IRS by Jan. 31 (again, Feb. 1 in 2021) through paper or electronic filing.
✓ As part of the Taxpayer First Act, 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.
Nonemployee compensation may be subject to backup withholding if a payee has not provided a taxpayer identification number to the payer or the IRS notifies the payer that the TIN provided was incorrect.
A TIN can be one of the following numbers:
• Social Security
• Employer identification
• Individual taxpayer identification
• Adoption taxpayer identification
What is backup withholding?
Backup withholding can apply to most kinds of payments reported on Forms 1099 and W-2G. This means that the person or business paying the taxpayer doesn’t generally withhold taxes from certain payments. There are, however, situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income. This is backup withholding.
Contact us if you need assistance or have any questions.
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Ref: IRS Tax Tip 2020-80
Thank you for including a clear description and instruction. I can already anticipate folks having a hard time with this form this year. I’m going to send this page to all my independent contractor clients (I’m a CPA) so they can anticipate it.