What Is Form 1099-NEC: Nonemployee Compensation?
Beginning in the 2020 tax year, Form 1099-NEC is the Internal Revenue Service (IRS) form used by businesses to report payments made to independent contractors, freelancers, sole proprietors, and self-employed individuals. The 2020 form is a redesign of a 1982 form of the same name. In more recent years, prior to 2020, nonemployee compensation was reported in box 7 on Form 1099-MISC.
Form 1099-NEC was resurrected to address confusion related to dual-filing deadlines on Form 1099-MISC. In past years, the IRS detected significant fraud relating to individuals falsifying 1099-MISC forms by reporting small employee compensation and large withholdings. These individuals filed their tax returns, requesting sizable refunds, prior to the March 31 IRS filing deadline for the Form 1099-MISC.
The IRS was unable to match recipient information with the corresponding 1099-MISC. In order to remedy the issue, the IRS delayed issuing refunds based on the Earned Income Tax Credit (EITC) until after Feb. 15 and simultaneously pushed back the filing deadline for the nonemployee compensation portion of the 1099-MISC to Jan. 31. All other payment types on the 1099-MISC still had a March 31 due date. This dual-filing deadline caused confusion for many payers.
- The due date for payers to complete the Form 1099-NEC is Jan. 31 (Feb. 1 in 2021, due to Jan. 31 falling on a weekend).
- Recipients receive a 1099-NEC if they were paid more than $600 in nonemployee compensation in one year.
- Independent contractors, freelancers, sole proprietors, and self-employed individuals are examples of “nonemployees” who would receive a 1099-NEC.
- The recipient uses the information on a 1099-NEC to complete the appropriate sections of their tax return.
Who Can File Form 1099-NEC: Nonemployee Compensation?
Businesses should complete a Form 1099-NEC for any nonemployee person to whom the business paid $600 or more during the year. This includes fees, commissions, prizes, or awards for services completed by independent contractors, cash payments for fish purchased from anyone engaged in the business of catching fish, or payments made to an attorney. The form must also be completed for any person from whom federal income tax has been withheld under backup withholding rules, regardless of the amount of payment.
Gross proceeds, such as settlement payments paid to an attorney, should not be reported on the 1099-NEC. Rather, it is reported on box 10 of the 1099-MISC. Only legal fees paid directly to the attorney are reported on 1099-NEC.
Businesses should provide the 1099-NEC to recipients by Jan. 31 of the following year. (In 2021, the due date is Feb. 1, due to Jan. 31 falling on a weekend.)
How to File Form 1099-NEC: Nonemployee Compensation
Payments made for services completed by independent contractors, for the purchase of fish from someone in the fishing trade or business, or fees paid to an attorney are reported in box 1 of Form 1099-NEC. If the payer business sold consumer products totaling $5,000 or more to the recipient on a buy-sell, deposit-commission, resale, or other basis, enter an “X” in the checkbox on box 2. Box 3 is to remain blank; it is reserved for use in later tax years. Federal income tax withheld during the year is reported in box 4. Boxes 5 through 7 are information for state income tax purposes.
Recipients of Form 1099-NEC should use the information provided on the form to fill out the appropriate sections on their tax return. For sole proprietors, report this information on Schedule C (for business profit and loss) or F (for farming profit and loss). If the recipient is a partnership, the information should be used to complete Form 1065 and Schedule K-1; the partners would then complete Schedule SE (Form 1040). If the income reported on the Form 1099-NEC is not self-employment income, but instead from a sporadic activity or hobby, report it on line 8, “Other Income,” on Schedule 1 (1040).
Download Form 1099-NEC: Nonemployee Compensation
Here is a link to a downloadable Form 1099-NEC for the tax year 2021. Copy A of the form is in red; it is for informational purposes and Internal Revenue Service use only.