Form 1099-NEC: Nonemployee Compensation

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Form 1099-NEC: Instructions, and Due Date

Updated on January 20, 2021 - 10:30 AM by Admin, TaxBandits

2020 has not been an ordinary year. We have seen many challenges and changes that we never could have predicted. The IRS is not the exception. Many IRS forms have been updated several times than before. In addition to the frequent updates and revisions, a new Form 1099-NEC has been introduced. The IRS did this to eliminate the clash of deadlines in filing the Form 1099-MISC for different types of payments.

In this article, we cover the following topics:

1. What is IRS Form 1099 NEC?

IRS Form 1099-NEC is a new form that payers should complete if they have paid at least $600 of nonemployee compensation to an independent contractor/vendor. The payments may include:

  • Fees
  • Commissions
  • Prizes
  • Awards
  • Fish purchases for cash
  • Any other form of compensation for services performed for your trade or business by an individual who is not your employee.

Until the previous tax year 2019, nonemployee compensation was reported on Form 1099-MISC in Box 7. Starting in 2020, it should be reported separately on Form 1099-NEC.

2. What is the reason for the introduction of 1099-NEC?

Actually, the 1099-NEC is not a new form. You may be surprised to read this, but it is true! Form 1099-NEC was an active form until 1982, it is now returning to the spotlight for tax year 2020.

The IRS relaunched 1099-NEC because of the confusion in the deadline to file 1099-MISC with nonemployee compensation. Until 2015, the deadline to file 1099 MISC with nonemployee compensation and other miscellaneous payments was February 28. In 2015, the introduction of the Protecting Americans from Tax Hikes Act (PATH Act) changed the deadline to January 31 for filing 1099-MISC with non employee compensation specifically.

Prior to tax year 2020, if payers used 1099-MISC for reporting miscellaneous payments, they had to submit it to the IRS on or before January 31. If 1099-MISC was used to report non-employee compensation, it had to be submitted before February 28.

Two different deadlines for the same form confused many, including payers and vendors. In fact, the IRS considered the returns late if they were received after January 31. To clear up this confusion, the IRS decided to relaunch the Form 1099-NEC. This has given peace of mind to all payers and vendors and the IRS too.

As a result, payers can choose to file 1099-MISC or 1099-NEC based on their reportable payments for 2020 and beyond. However, payers should use Form 1099-MISC to report nonemployee compensation and other miscellaneous payments for the tax year 2019 and prior.

Form Type Tax Year 2019 & Prior Tax Year 2020 & Beyond
Form 1099-MISC Report nonemployee compensation & other miscellaneous payments Report miscellaneous payments
Form 1099-NEC Not in use Report nonemployee compensation

Know more about Form 1099-MISC and 1099-NEC differences.

3. When is the 1099-NEC filing due date?

As per the IRS, you can file 1099-NEC both on paper or electronically. Whether you paper file or e-file, it should be completed on or before January 31. Since January 31 is a holiday, the due date is changed for the tax year 2020. The deadline for 1099-NEC filing is February 01, 2021. A copy of the complete form should be sent to the vendors/contractors on or before February 01, 2021.

1099-NEC due date - 2020

Form Type Paper filing E-filing Recipient copy
Form 1099 NEC 2020 February 01, 2021 February 01, 2021 February 01, 2021

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.

4. What are the instructions for completing 1099-NEC for the
tax year 2020?

You may feel some trepidation when filing 1099-NEC for the first time. However, it is more simple and straightforward than you think. There are only seven boxes to report, and we have described every box in detail to make the process as easy as possible.

Let’s learn how to complete the 1099-NEC, it takes only a few minutes:

Before you start filing 1099-NEC, keep the following details handy.

  • 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

First, enter all the above details in the given boxes. Then, you need to enter the account number and select the checkboxes accordingly.

Account number - Enter the reference number to distinguish this recipient from other recipients.

FATCA filing requirement - Check this box if you are a U.S. taxpayer using a foreign account to make payments. According to the Foreign Account Tax Compliance Act (FATCA) under the HIRE Act, foreign financial institutions or individual entities should report on the assets managed by their U.S account holders. It also requires U.S. taxpayers to report based on their foreign financial accounts and foreign assets. For more information, click here.

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 and 3: Leave them blank

  • 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.

    Click here to know more on Form 1099-NEC Instructions.

5. What are the copies of 1099-NEC?

Form 1099-NEC has 5 copies in total. 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.

6. What are the penalties for not filing 1099-NEC?

Whether you file 1099-NEC or any other forms, they must be filed on or before the deadline. If you do not file on time, you can be penalized by the IRS.

The IRS maintains the same penalty and interest rate for all 1099 forms, including 1099-NEC. There is no new penalty rate for failing to file the 1099-NEC on time.

1099-NEC penalty for late filing - 2020

No. of days delayed Large Companies with Gross Receipts of More Than $5 Million Small Companies with Gross Receipts $5 Million or Less
Filing up to 30 days late $50 per return $50 per return
Filing between 31 days late and August 1 $110 per return $110* per return
After August 1 or not at all $270 per return $270* per return
Intentional Disregard $550 per return $550 per return

To stay compliant with the IRS, you should file 1099 NEC before the deadline. And, TaxBandits is here to help you.

TaxBandits is a leading IRS-authorized e-file provider. We support the e-filing of 1099-NEC and other IRS forms for 2020. We have updated our application according to the most recent updates from the IRS.

Get started with TaxBandits today!