1099-NEC and 1099-MISC

From the 2020 tax year moving forward, there is a new change in how business owners and tax specialists work on specific tax reporting types. 1099-MISC replaced by 2020 Form 1099-NEC for reporting Box 7-nonemployee compensation, replacing the old Form to report all other compensation.

See below some guidelines on how to use the Forms and the difference of each Form correctly.

What is 1099-NEC?

NEC stands for Non-Employee Compensation. The 1099-NEC is from an old form being used since 1982. IRS improved it to save time and to address administrative issues. 1099-NEC completely classifies specific data from Box 7 of the 1099-MISC, on top of wavering due dates filing.

In using the new Form, you need to understand who is considered a nonemployee compensation. These are the payments to nonemployees (independent contractors, freelancers, vendors, consultants, and other self-employed individuals – usually known as 1099 workers). This appeared before in 1099-MISC box 7.

As per IRS, a combination of these four conditions identifies which payment to report in Box 1 of the 1099-NEC:

  • For a nonemployee
  • For services in the field of your trade or business
  • For an individual, partnership, estate, or, in some cases, a corporation
  • With a pay of $600 or more for the calendar year

Be aware: You must also file Form 1099-NEC (report in box 4) for those you withheld federal income tax following the backup withholding rules, despite the amount.

Useful Tips with the 1099-NEC

For an easy process with the new 1099-NEC, see these dos and don ts:

  • Confirm that the taxpayer ID is accurate. You need to have Form W-9 with the current taxpayer ID before completing Form 1099-NEC.
  • Send to recipients by January 31st (Feb. 1 for 2021 because Jan. 31 happens to be a Sunday)
  • File to IRS by Jan. 31 (Feb. 1 in 2021) by electronic or paper filing.
  • Reporting personal payments does not use Form 1099-NEC
  • Reporting employee wages uses Form W-2 instead; don’t use Form 1099-NEC

What’s in it for 1099-MISC

Nonemployee compensation reporting is eliminated from Form 1099-MISC for the 2021 tax period and moving forward.

The IRS revised Form 1099-MISC.

The most significant shift is in Box 7. If the payer made direct sales of $5,000 or more, Box 7 should be checked off.

Added reporting has been completed in these fields:

  • For crop insurance goes to Box 9
  • Gross proceeds to an attorney (not fees) in Box 10
  • Section 409A deferrals in Box 12
  • Nonqualified deferred compensation income in Box 14

For Form 1099-MISC, the recipients’ distribution date is also Jan. 31 (Feb. 1 in 2021), but the IRS filing deadlines are different: Feb. 28 if paper filing (Mar. 1 in 2021) and Mar. 31 if filing electronically.

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