For the millions of businesses who hire contractors, freelancers, etc. and issue them 1099-MISC forms each year, there’s a big change effective from the tax year 2020 (the taxes most will file in early 2021).
Businesses now must use form 1099-NEC for these individuals (people who are not your employees, but you pay them for their work or services). In the past, that income was reported on form 1099-MISC on line 7 “non-employee compensation.” The MISC version will still be used for reporting other types of payments such as rents, royalties, medical payments and others.
The due date for forms 1099-NEC and MISC to be filed and sent to the contractor is January 31 of each year, with no automatic 30-day extension. Previously, the date had been February 28. The NEC form is not actually new, but is a revival of a form with the same name that was discontinued in 1982, when the IRS consolidated it into the MISC form.
The changes were enacted into law as part of the PATH Act, which was enacted in December 2015, but these form changes are only now going into effect. The IRS and legislators said the changes were necessary to reduce potential fraud and to align filing deadlines with other forms.
Who Needs to File Form 1099-NEC?
- Those who made payments totaling $600 or more in a year to someone who is not an employee
- These payments were for services necessary for the business
- These payments were made to a person, partnership, estate or corporation
What Types of Payments?
- Fees paid to attorneys, accountants, architects
- Fees paid for rentals or leases
- Commissions paid to non-employees for sales
Exceptions: Payments for merchandise, for phone, and to tax-exempt organizations
Note: Compensation paid does not need to be reported if the total for the year is under $600. Also, personal payments should not be reported; only those payments that are necessary costs for the business.
The NEC will be included in most professional payroll systems by the end of 2020 and can be e-filed from those systems or using the IRS FIRE system. Businesses can also download and print the new Form 1099-NEC for 2020 and instructions for free from the IRS website.
Contractors who do not receive a copy of the form by January 31 should contact the company directly to request it.
So, to clarify: Businesses might still have to file both the MISC and NEC forms each year, but payments of $600 or more each year made to a contractor must be reported on the 1099-NEC form. Payments made to regular employees should continue to be made on Form W-2.