Editorial · January 6, 2021
Form 1099-NEC: Reporting Contractor Pay for the First Time
Form 1099-NEC is a new IRS form for tax year 2020. It reports money you paid to people who are not your employees. If you hired a freelancer, a consultant or another contractor in 2020, this form may be yours to file. The due date is February 1, 2021.
What Form 1099-NEC is
The letters stand for nonemployee compensation. That is the IRS term for pay to someone who does work for your business but is not on your payroll. Think of a graphic designer, a plumber, a bookkeeper or a delivery driver who runs their own business.
Until now, businesses reported this pay on Form 1099-MISC. Starting with tax year 2020, it has its own form. The IRS revised Form 1099-MISC and moved some of its box numbers to make room. Other items, such as rent and royalties, still go on Form 1099-MISC.
Why the pay moved to a new form
The reason is a date. A 2015 law called the PATH Act moved the deadline for reporting contractor pay from the end of February to the end of January. It also ended the automatic 30-day extension for forms that include this pay. The IRS gave those forms a separate home so the two deadlines would not clash.
The result is simple. Form 1099-NEC carries the early deadline. Form 1099-MISC keeps the later ones. Under the IRS instructions, a paper Form 1099-MISC is due March 1, 2021, and an electronic one is due March 31, 2021.
Who gets a Form 1099-NEC
The IRS lists four tests. If all four are true, you must generally report the payment.
- You paid someone who is not your employee.
- You paid for services in the course of your trade or business.
- You paid an individual, a partnership, an estate or, in some cases, a corporation.
- You paid that person at least $600 during the year.
Nonprofits count as being in a trade or business, so they must follow the same rule. Personal payments do not count. If you paid a neighbor to paint your own house, you do not file.
The IRS says box 1 should include fees, commissions, and parts and materials tied to the services. It also covers payments to attorneys of $600 or more. You must also file the form for anyone you withheld federal income tax from under the backup withholding rules, whatever the amount.
What to leave off the form
Some payments do not belong in box 1. Wages for an employee go on Form W-2, not here. So do an employee's travel allowance and bonuses. Rent goes in box 1 of Form 1099-MISC. Royalties go in box 2 of that form.
The line between a contractor and an employee matters. The IRS says that, generally, you report payments to independent contractors in box 1 of Form 1099-NEC. If you treat someone as a contractor but they are really an employee, the form does not fix that. The IRS instructions also discuss employment tax relief rules for those cases.
Backup withholding goes in box 4. It applies, for example, when a payee has not given you a taxpayer identification number. Because of this, many businesses ask each contractor for their details before the first payment, not after the year ends.
What to do before February 1, 2021
You have about four weeks from today. Here is a short plan.
- List everyone you paid for services in 2020 and add up what each person received.
- Pick out the people who got $600 or more.
- Check that you have each person's name, address and taxpayer identification number.
- Fill out Form 1099-NEC, with the total in box 1, and file it by February 1, 2021, on paper or electronically.
Do not plan on an extra month. The IRS instructions point to Form 8809 for extensions of time to file, so a late filer has to ask. The extension is no longer automatic for this form. Late forms can bring penalties, so start now.
One more point. Many payers will report some of the same payees on both forms. A landlord who also hires a contractor may file Form 1099-MISC for rent and Form 1099-NEC for the services. Keep your lists separate so each payment lands on the right form.
Sources
- IRS, Instructions for Forms 1099-MISC and 1099-NEC (2020), irs.gov/instructions/i1099msc
- IRS, About Form 1099-NEC, Nonemployee Compensation, irs.gov/forms-pubs/about-form-1099-nec