1099-MISC or 1099-NEC? What You Need to Know about the New IRS Requirements

1099-MISC or 1099-NEC? What You Need to Know about the New IRS Requirements

The IRS has made a major change to 2020 tax reporting that will impact business owners and tax professionals. Form 1099-NEC has recently been released, replacing Form 1099-MISC box 7 data for reporting non-employee compensation beginning with the reporting of 2020 tax info.

The Purpose of Form 1099-NEC

The new 1099-NEC (NEC stands for Non-Employee Compensation) is based on an old form that has been retired since 1982. The requirements to file non-employee compensation on the reinstated 1099-NEC are the same as had been in place for the 1099-MISC with box 7 data.

Specifically, the new 1099-NEC will capture payments of $600 or more to service providers — typically work done by an independent contractor who is a sole proprietor or member of a partnership. Examples include graphic designers, web developers, cleaning professionals, freelance writers, landscapers, home health care assistants and other self-employed individuals.

It's important to note that you must also file Form 1099-NEC (report in box 4) for anyone you withheld federal income tax under the backup withholding rules, regardless of the amount.

Both Forms     1099-NEC 1099-MISC
Payer Information Box 1 Nonemployee compensation Rents
Recipient Information Box 2 Reserved (blank) Royalties
    Box 3 Reserved (blank) Other income
    Box 4 Federal income tax withheld Federal income tax withheld
    Box 5 State tax withheld Fishing boat proceeds
    Box 6 State/Payer's state no. Medical and health care payments
    Box 7 State income Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale
    Box 8 N/A Substitute payments in lieu of dividends or interest
    Box 9 N/A Crop insurance proceeds
    Box 10 N/A Gross proceeds paid to an attorney
    Box 11 N/A Reserved (blank)
    Box 12 N/A Section 409A deferrals
    Box 13 N/A Excess golden parachute payments
    Box 14 N/A Nonqualified deferred compensation
    Box 15 N/A State tax withheld
    Box 16 N/A State/Payer's state no.
    Box 17 N/A State income

Form 1099-NEC replaces Form 1099-MISC with box 7 data as the new form for reporting nonemployee compensation. This change is for the 2020 tax year, which are filed in 2021.

Why the Change Occurred

Back in 2015, the PATH (Protecting Americans from Tax Hikes) Act changed the due date for 1099-MISC forms with data in box 7 from March 31 to January 31. However, the filing date for non-box 7 forms remained March 31. As a result of the two different deadlines for the same form, late 1099-MISC forms for non-employee compensation sometimes led to the counting of non-box 7 forms as late.

Let’s look at a scenario:

  • You submit your forms with data in box 7 to the IRS by the January 31 deadline.
  • Some late box-7 forms arrive after January 31.
  • You then send non-box 7 forms to the IRS, meeting the deadline of March 31.
  • In the same batch, you send the late box-7 forms.

Because the late box-7 forms are combined with the non-box 7 forms, the IRS sometimes mistakenly considered all the forms late. The new 1099-NEC form was reinstated to prevent this from occurring.

Filing and Submitting Guidelines

Beginning with the 2020 forms, copies of your 1099-NEC forms must generally be distributed and/or postmarked to independent contractors and other recipients by January 31. In 2021, however, the date is February 1 since January 31 falls on a Sunday. The deadline for submitting to the IRS is the same as the recipient deadline — regardless if filing via paper or electronically.

As part of the Taxpayer First Act, many businesses will not be allowed to submit paper forms. For tax year 2020, you must electronically file if you have 100 forms or more. The threshold applies separately for each type of return and separately to each type of corrected return.

When to Use Form 1099-MISC

You should use the 1099-MISC for non-box 7 reporting. The type of payments typically required to be reported on this form include royalties, rent, prizes and awards. You must also file Form 1099-MISC for anyone from whom you withheld federal income tax under the backup withholding rules, regardless of the amount. In some cases, you will need to file both a 1099-NEC and a 1099-MISC for the same individual.

The deadlines for 2020 Form 1099-MISC are:

  • January 31: Distribute to recipients (for 2021, the date is February 1)
  • February 16: Distribute to recipients with data in Boxes 8 or 10
  • February 28: Submit forms to the IRS if filing by paper (for 2021, the date is March 1)
  • March 31: Submit forms to the IRS if filing electronically

Once again, for tax year 2020, the electronic filing threshold is 100 forms.

2020 Information Returns

Form Recipient Due Date IRS Due Date
(Paper Filing)
IRS Due Date
(Electronic Filing)
1099-NEC 2/1/21 2/1/21 2/1/21
1099-MISC
(No Data in Box 8 or 10)
2/1/21 3/1/21 3/31/21
1099-MISC
(With Data in Box 8 or 10)
2/16/21 3/1/21 3/31/21

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