If you're an independent contractor, you may have noticed you received a new Internal Revenue Service (IRS) form for the 2020 tax year, Form 1099-NEC, Nonemployee Compensation. Previously, you would have received this same information on Form 1099-MISC, Miscellaneous Income. If you're a small business owner or independent contractor, what does this new IRS form mean for you?
How to use form 1099-NEC
The IRS relies on informational returns from businesses and other payors to verify information reported by taxpayers on their tax returns. If you own a small business, you should file a Form 1099-NEC if you pay a vendor more than $600 in the tax year.
For the payor
To get the necessary information you need to complete Form 1099-NEC, you should request all vendors fill out a Form W-9, Request for Taxpayer Identification Number and Certification, when you begin a new business relationship. While you don't need to submit Form W-9 to the IRS, you use information from it, such as the vendor's name, address, and taxpayer ID number, to complete the 1099-NEC at tax time.
The due date for Form 1099-NEC is January 31. If January 31 falls on a weekend, the due date moves to the following business day. If a business fails to file Form 1099-NEC by the deadline, the IRS applies a penalty. The penalties range as follows:
- $50 for late forms filed no later than 30 days after the deadline
- $110 for late forms filed after 30 days but prior to August 1
- $280 for forms filed after August 1 or not filed at all
For the payee
If you're an independent contractor, you should receive a 1099-NEC from any job that paid you more than $600. You need to enter your nonemployee compensation on Schedule C, Profit or Loss From Business, exactly as it appears on the 1099-NEC. The IRS will compare what you enter on your tax return to the information it received directly from the payor.
1099 NEC vs. 1099 MISC: Why the change?
The IRS claims the new Form 1099-NEC helps to detect tax refund fraud by simplifying the income verification process. As mentioned above, when a taxpayer reports income on his or her tax return, the IRS compares that amount to the informational form it received from the payor. To understand this process, it's important to understand the history around various tax filing and tax reporting deadlines.
In the past, the IRS became aware of a fraud scheme in which taxpayers were reporting minimal nonemployee compensation and large tax withholdings. This resulted in large refunds, due mainly to the Earned Income Tax Credit (EITC). These taxpayers filed their returns early in the tax season, prior to the filing deadline for the Form 1099-MISC—February 28 by mail or March 31 if filed electronically. The IRS did not have the informational return from the payors to verify the income.
As a stopgap measure, the IRS delayed issuing refunds that were due to the EITC until after February 15. At the same time, the IRS moved up the filing deadline for the nonemployee compensation portion of the 1099-MISC to January 31, the same deadline as Form W-2, Wage and Tax Statement, for employee compensation.
This caused another issue: two filing deadlines on the same form. All other miscellaneous payments reported on the Form 1099-MISC continued to have a later filing deadline. This, rightfully, confused many taxpayers. Therefore, in order to remedy the dual-filing deadline issue and simplify the income verification process, the IRS brought back the previously retired Form 1099-NEC.
Modifications to 1099-NEC and 1099-MISC
The new 1099-NEC is a revision of an older form by the same name. Prior to its revision, it had not been used since 1982. For the 1983 to 2019 tax years, businesses reported nonemployee compensation in box 7 of the 1099-MISC.
In tax year 2020, the IRS rearranged multiple boxes on the 1099-MISC after it removed nonemployee compensation from the form. Box 7 now includes a checkbox for "Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale."
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