New IRS Form 1099-NEC and changes to Form 1099-MISC.
A new IRS Form 1099-NEC will be used to report all payments made to nonemployee service providers, while Form 1099-MISC will narrow in scope, retaining its focus on royalties, health care payments, and other business-related payments not made directly to an individual.
Businesses that would typically provide a Form 1099-MISC to independent contractors (and certain others) and the IRS need to be aware of new IRS Form 1099-NEC. For non-employee compensation paid during 2020, payers must provide Form 1099-NEC (instead of Form 1099-MISC) to the recipients and to the IRS no later than January 31, 2021. In addition, the IRS has redesigned Form 1099-MISC, so businesses should expect that reporting may be somewhat different from past years.
Payments Reported on Form 1099-NEC
Businesses must provide a Form 1099-NEC if all of the following apply to payments made in 2020:
- The payment is made to someone performing services as a non-employee
- The payment is for services performed in the course of the entities’ trade or business
- The payment is for $600 or more for the year
Some examples of common payments that must be reported on Form 1099-NEC include:
- Fees paid to members of the business’s board of directors who are not employees
- Fees paid to independent contractors
- Commissions paid to nonemployee salespeople that were not repaid during the year
- Professional service fees paid to attorneys (including payments made to corporations)
- Fees paid by one professional to another (such as “fee-splitting” arrangements)
- Payments for services, including payments for parts or materials used to perform the services, if they were incidental to the service
Businesses must also file Form 1099-NEC for anyone from whom they withheld federal income tax under back up withholding rules, for any amount (even if under $600).
Use Form 1099-NEC only when payments are made in the course of a trade or business. Personal payments (like paying a household employee) are not reportable on Form 1099-NEC.
Generally, a trade or business is operated for gain or profit. Nonprofit organizations are considered to be engaged in a trade or business and should use Form 1099-NEC. Federal, state, or local government agencies should also use Form 1099-NEC.
Form 1099-NEC is not actually “new,” since the IRS used it until 1982. The IRS revived it starting in 2020 to keep better track of non-employee compensation. This change was driven by the gig economy and employers’ increased use of independent contractors. From 1982 to 2019, non-employee compensation was included in Form 1099-MISC.
Redesigned Form 1099-MISC
Businesses should also be aware that the IRS redesigned the 2020 Form 1099-MISC due to the creation of Form 1099-NEC. Specifically, the IRS rearranged several box numbers on the 2020 Form 1099-MISC, so payers should use:
- Box 7 (check box) for payer made direct sales of $5,000 or more
- Box 9 for crop insurance proceeds
- Box 10 for certain payments to an attorney (that are not reported on Form 1099-NEC)
- Box 12 for IRC Section 409A deferrals (this would only apply in rare situations that are not reportable on Form 1099-NEC)
- Box 14 for nonqualified deferred compensation income (this is optional and would only apply in rare situations that are not reportable on Form 1099-NEC)
- Boxes 15, 16 and 17 for state taxes withheld, state identification number and amount of income earned in the state, respectively
Businesses may need some time to update their payroll processing or reporting systems to generate new IRS Form 1099-NEC and to accommodate the changes to the 2020 Form 1099-MISC. They should expect that 2020 reporting will not be simply the same as last year.
Businesses cannot download usable copies of Form 1099-NEC from the IRS website, so they may need some time to obtain copies of the new forms. Businesses can order paper copies of Form 1099-NEC from the IRS.
Due to COVID-19 delays, it is unclear how long it would take the IRS to mail paper copies of the forms, so ordering early would be a good idea.