November 19, 2020

IRS Introduces New Form 1099-NEC for Non-Employee Compensation

In a move of particular importance to employers who work with freelancers, contract workers and other non-employees, the IRS recently released the new Form 1099-NEC for tax year 2020.

Beginning with tax year 2020, employers must use the new form to report non-employee compensation that meets the following four conditions:

  • You made the payment to someone who is not your employee.
  • You made the payment for services rendered in the course of your trade or business (including government agencies and nonprofit organizations).
  • You made the payment to an individual, a partnership, an estate or, in some cases, a corporation.
  • You made payments to the payee of at least $600 during the year.

This new form replaces form 1099-MISC, Box 7, which has been used in the past for reporting non-employee compensation. You will still be required to file Form 1099-MISC for payments in the amount of $600 or more (unless otherwise noted) made in the course of your trade or business (including not-for-profit organizations) that are related to the following items:

  • Prizes and awards (does not include amounts paid to employees);
  • Rents;
  • Royalties ($10 or more);
  • Legal services performed; and
  • Any person from whom you have withheld any federal income tax under the backup withholding rules (regardless of the amount of the payment).

About Form 1099 Recipients
Generally, amounts paid to individuals, sole proprietors and partnerships for the items above should be reported. Payments to tax-exempt organizations and corporations (C or S Corporations) are exempt. Whether or not a 1099 should be issued to a limited liability company (LLC) will depend on how that company is classified for tax purposes. If treated as a single member LLC that is disregarded or as a partnership, payments are reportable. If treated as a C or S Corporation, payments are exempt.

All payments of at least $600 to attorneys should be reported, even if the attorney is a professional corporation.

Filing Requirements and Due Dates
Recipient information (i.e., name, address, and tax identification number), the amount paid during the calendar year and type of payment are required information. It will help to acquire Form W-9, Request for Taxpayer Identification Number and Certification, from vendors as soon as possible.

Forms must be transmitted to the IRS before the deadline of January 31, 2021. However, when the due date falls on a weekend or holiday, it will be due on the next business day. Additionally, other important due dates are as follows:

  • File Form-NEC with the IRS on or before February 1, 2021, using either paper or electronic filing procedures.
  • A recipient copy of Form 1099-NEC and 1099-MISC is due to be distributed by February 1, 2021.
  • File Form 1099-MISC by March 1, 2021 (if filing on paper) or March 31, 2021 (if filing electronically)

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