For the 2020 tax year, the IRS has a new information return – Form 1099-NEC – and with it, a new filing requirement. Traditionally, businesses have used one form – Form 1099-MISC – to report payments made to nonemployees. Now, there are two forms with their own specifications. Here’s what you need to know heading into tax season.
What’s Form 1099-NEC?
If you’re involved in a trade or business, you must file Form 1099-NEC to report any nonemployee compensation of $600 or more. Nonemployee compensation includes fees, commissions, prizes, awards, and any other forms of compensation for services performed by someone who isn’t classified as your employee. Oil and gas payments for a working interest and expenses incurred for the use of an entertainment facility that you treat as compensation are also nonemployee compensation.
Common examples of nonemployees are independent contractors or attorneys you pay for their legal services.
Generally, you’re required to file a Form 1099-NEC if you meet the following conditions:
- You paid someone who’s not your employee
- You paid for services in the course of your trade or business
- You paid an individual, partnership, estate, or corporation (in some cases)
- You paid at least $600 to the payee during the year
You’ll have to complete one Form 1099-NEC for each payee you pay in excess of $600 and send each payee a statement.
What’s Form 1099-MISC?
Form 1099-MISC reports the miscellaneous income you paid to individuals in 2020. Miscellaneous income includes:
- At least $10 in royalties or broker payments
- At least $600 in
- Prizes and awards
- Other income payments
- Cash paid from a notional principal contract to an individual, partnership, or estate
- Any fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Payments to an attorney (in connection with legal services, but not for the attorney’s services i.e., a settlement agreement)
- Nonqualified compensation
If you have to file a Form 1099-MISC, you must also send the recipient a statement. Visit the IRS’s website for more Form 1099-MISC requirements.
Do I have to file a 1099 form?
If you made any of the payments listed above in the course of your trade or business, yes. If you’re self-employed or own a business, it’s highly likely that you’ll have to file some type of Form 1099. The answer is no if you’ve kept all payments under $600.
Businesses and self-employed individuals aren’t the only ones who have to file 1099 forms. The following entities are also required to file 1099s:
- Trusts of qualified pension or profit-sharing plans of employers
- Certain organizations that are exempt from tax under section 501(c)
- Farmers’ cooperatives that are exempt from tax under section 521
- Widely-held fixed investment trusts
- Federal, state, and local government agencies
Remember, you don’t have to report any personal payments.
And, you aren’t required to file a 1099 form if:
- You’re not engaged in a trade or business
- You’re engaged in a trade or business and the payment was made to another business that’s incorporated, but it wasn’t for medical or legal services
- You’re engaged in a trade or business and the sum of all payments made to the person or unincorporated business is less than $600 in one tax year
Keep in mind, you must use the appropriate form for each payment type. If you paid the same payee for different reasons – say nonemployee compensation and rent – you need to file a Form 1099-NEC for the compensation and Form 1099-MISC for the rent.
When are 1099 forms due?
For tax year 2020, Form 1099-NEC is due to both the IRS and to recipients on Feb. 1, 2021.
Form 1099-MISC is due March 1, 2021, if you file on paper, or March 31, 2021, if filing electronically. Statements to recipients are due on Feb. 1, 2021.
There are no extensions for either form.
Why do I have to file 1099 forms?
The IRS uses 1099 forms to ensure recipients are properly reporting their payments on their tax returns. It’s important that you complete the forms accurately and report each payment in the proper box.
Make sure you’re paying attention to what type of payments you made, how much you paid to each payee, and report the payments on the appropriate form(s). Reach out to your tax professional if you have any questions.
If you need help filing your 1099 forms, contact us for a free quote!