What is Form 1099-NEC? | Nonemployee Compensation
2021 has not been an ordinary year altogether. We have seen so many challenges and changes that we could never have predicted. The IRS is not an exception. Many IRS tax forms have been updated several times than before. For the 2021 tax year, IRS has made some major changes to Form 1099-NEC. The changes include 3 field level changes (on box 1, box 2, and FATCA check box).
What is IRS Form 1099 NEC?
IRS Form 1099-NEC is to report nonemployee compensation. Payers should complete Form 1099-NEC if they have paid at least $600 of nonemployee compensation to an independent contractor or vendor.
These payments include,
- Fees
- Commissions
- Prizes
- Awards
- Fish purchases for cash
- Any other kind of compensation for services performed for your trade/business by an individual who is not your employee.
Till the tax year 2019, the nonemployee compensation has been reported in Box 7 of the 1099-MISC. From the 2020 tax year, it should be reported separately on Form 1099-NEC.
Why did they introduce Form 1099-NEC?
Form 1099-NEC is not a new form. It has been relaunched. IRS Form 1099-NEC was an active form until 1982. The IRS reintroduced 1099-NEC because of the confusion in the deadline to file 1099-MISC with nonemployee compensation. Till 2015, February 28 is the deadline to file 1099 MISC with nonemployee compensation & other miscellaneous payments. The introduction of the PATH Act, Protecting Americans from Tax Hikes Act (PATH Act) in 2015, revised the deadline to January 31 for filing 1099-MISC with nonemployee compensation specifically.
Earlier, if payers used form 1099-MISC for reporting miscellaneous payments, they had to submit it to the IRS on or before January 31. If they used 1099-MISC to report nonemployee compensation, they had to submit the return before February 28.
These two different deadlines for the same form confused payers and vendors. Also, the IRS considered the return received after January 31 as late filing. To solve this confusion, the IRS decided to relaunch Form 1099-NEC.
Based on the reportable payments, payers can now choose to file 1099-MISC or 1099-NEC for 2020 & beyond. But payers should use Form 1099-MISC to report nonemployee compensation and other miscellaneous payments for the tax year 2019 and prior.
Learn more about Form 1099-MISC and 1099-NEC differences.
When is the 1099-NEC filing due date?
You can choose either to paper file or e-file your 1099-NEC form. IRS recommends the filers file form 1099-NEC electronically. The deadline to file form 1099-NEC is on or before January 31st. Also, a copy of the completed form should be sent to the vendors/contractors by January 31st.
If you want to file 1099-NEC this tax year, electronic filing is the best option. You will get an instant status of your return. When paper filing, you won’t know whether your forms reached the IRS or not because the IRS will notify you only if the return contains any errors. To stay updated on the status of your return, it is always better to e-file. The IRS also suggests e-filing because of the faster processing rate.
What are the instructions to complete 1099-NEC for the tax year 2021?
Filing 1099-NEC for the first time can be overwhelming. However, it is more simple & straightforward than you think. You only have seven boxes to report, and we have described every box in detail to make the process effortless.
Let’s learn how to complete the 1099-NEC in a few minutes. Keep the following details handy before you start filing 1099-NEC.
- Payer’s name with complete address and telephone number.
- Payer’s TIN
- Recipient’s TIN
- Recipient’s name
- Recipient’s street address, city, state, country, and ZIP code
Once you complete filling the above-listed details, you need to enter the account number and check the boxes accordingly.
Account number — Enter the reference number to distinguish this recipient from other recipients.
2nd TIN not. — Check this box if you have been notified about an incorrect TIN in the past three years.
Box 1 — Nonemployee Compensation
Enter the nonemployee compensation of at least $600 paid to the recipient.
Box 2 — Payer made direct sales totaling $5,000 or more of consumer products to the recipient for resale
Boxe 3 — Reserved for Future Use
Box 4 — Federal income tax withheld
Enter the federal income tax withheld from the nonemployee compensation paid.
Box 5 — State tax withheld
Enter the state income tax withheld from the nonemployee compensation paid.
Box 6 — State/Payer’s state no.
Enter the abbreviated name of the state and the payer’s state identification number.
Box 7 — State income
Enter the amount of state payment.
What are the copies of 1099-NEC?
IRS Form 1099-NEC has five copies, and here, we have listed each copy and its purpose.
- Copy A — Should be filed with the IRS.
- Copy 1 — Should be filed with the state tax department. (Only if required)
- Copy B — Should be furnished to the recipients.
- Copy 2 — Should be given to recipients to file with their state income tax return. (If required)
- Copy C — Copy for payers to maintain in the business records.
What are the penalties for not filing 1099-NEC?
Whether you file 1099-NEC or any other tax forms, they must be filed on or before the deadline. The IRS can penalize you if you do not file on time.
The IRS maintains the same penalty & interest rate for all 1099 forms, including 1099-NEC. There is no specific new penalty rate for failing to file your 1099-NEC on time.
To stay compliant with the IRS, file your 1099-NEC before the deadline, and TaxBandits is here to help you.
Watch the video below to learn how to file Form 1099-NEC with TaxBandits.
TaxBandits is a leading IRS-authorized e-file service provider. We support
e-filing of 1099-NEC & other IRS tax forms for 2021. We are ready and have updated our application according to the most recent updates from the IRS.
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