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1099-NEC Replaces 1099-MISC for Independent Contractor Payments

Beginning in tax year 2020, the Internal Revenue Service (IRS) requires current and deferred nonemployee compensation payments to be reported using the (previously retired) Form 1099-NEC. The Form 1099-NEC replaces the Form 1099-MISC for nonemployee compensation payments and generally must be filed with the IRS by the following January 31. However, in tax year 2020, the filing deadline for the Form 1099-NEC is February 1, 2021, the first business day after January 31, 2021.

Examples of nonemployee compensation to report on the Form 1099-NEC include payments of at least $600 during the year:

  • To independent contractors
  • For professional services, such as attorneys
  • For commissions paid to nonemployee salespersons
  • For services rendered in the course of trade or business by someone who is not your employee

Generally, payments to a corporation do not have to be reported on the Form 1099-NEC, except for payments for attorneys’ fees, fish purchases, or payments by a federal executive agency for services.

The Form 1099-MISC still will be used to report other business payments, such as commercial rent payments, payments to attorneys other than for their services (e.g., in a settlement agreement), and other income (such as prizes and awards). The Form 1099-MISC has a later due date than the Form 1099-NEC and is due by March 1, 2021 (paper filing) or March 31, 2020 (electronic filing).

Why did the IRS make this change?

Prior to 2015, there were different IRS reporting deadlines for Form W-2 employee compensation payments (typically due January 31) and Form 1099-MISC nonemployee compensation payments (typically due at the end of February for paper filing or March 31 for electronic filing). The different reporting dates for employee and nonemployee compensation made it possible for taxpayers to file their taxes and receive a tax refund before a taxpayer’s Form 1099-MISC nonemployee income was even reported to the IRS, resulting in lower reported compensation than was actually earned.

In 2015, the Protecting Americans from Tax Hikes Act (the PATH Act) was enacted and remedied this problem by moving the filing deadline for businesses to report nonemployee compensation to January 31 (the same date businesses are required to report Form W-2 employee compensation). Aligning the deadline to report both employee and nonemployee compensation sped up the IRS’s receipt of information about a taxpayer’s total compensation and enabled the IRS to confirm the accuracy of information reported on the taxpayer’s Form 1040. After the PATH Act, employees, payees, and the IRS all receive the compensation information statements on January 31, and the IRS has until at least February 15 to confirm the information before issuing any refunds to taxpayers.

However, the later deadline to report other business payments (such as rent payments) that were still reportable using the Form 1099-MISC did not change. The different filing deadlines for nonemployee compensation and other business payments required employers to issue multiple Forms 1099-MISC in some cases, resulting in confusion for both businesses, taxpayers, and the IRS.

To solve the differing reporting deadlines for the Form 1099-MISC, the IRS decided to create a separate form for reporting nonemployee compensation and resurrected the previously retired Form 1099-NEC. Moving forward, businesses will be required to use the 1099-NEC to report payments to independent contractors and other nonemployee compensation payments and report these payments by the same deadline they report Form W-2 employee compensation. Business can still use the Form 1099-MISC for other business payments and submit it by the later deadline.

More information on the IRS revisions and reporting instructions for the Form 1099-NEC and Form 1099-MISC for the 2020 tax year can be found here.

Businesses with questions or concerns about payments made to independent contractors in 2020 and the Form 1099-NEC may wish to consult with their accounting and/or payroll service to ensure the correct forms are used. Boardman Clark’s Business and Tax team is also available to provide further advice and information to businesses navigating this change. 

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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