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Form 1099-NEC: New Guidelines for Nonemployee Compensation

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By Ashleen Sahni and Pooja Srivastava

For tax year 2020, businesses must start to use a redesigned Form 1099-NEC, Nonemployee Compensation for reporting certain payments to nonemployees, such as independent contractors. Businesses must issue the form to payees by February 1, 2021.

When to File Form 1099-NEC

All businesses must file a Form 1099-NEC form for nonemployee compensation if the payment meets all the following conditions:

  • It is made to a nonemployee.
  • It is made for services for your trade or business.
  • It is made to an individual, partnership, estate, or corporation.
  • The total payment made to the payee was $600 or more for the year.

Additionally, businesses must file Form 1099-NEC when they:

  • Pay an individual $10 or more in royalties, or
  • Withhold federal income tax, regardless of the payment amount to the nonemployee, under backup withholding rules.

The Internal Revenue Service (IRS) will not share federal tax data submitted on Form 1099-NEC with participating states. This means that businesses must file 1099-NEC federally, and then directly in the applicable state jurisdiction(s).

Payment Types Reported on Form 1099-NEC

Nonemployee compensation includes payments like:

  • Fees.
  • Commissions.
  • Prizes or awards.
  • Other compensation.

Some examples of payments you must report on Form 1099-NEC include professional service fees to attorneys, accountants, and architects, payments for services, payment for incidental parts or materials used to perform services, and more.

The Role of Form 1099-MISC

Form 1099-NEC does not replace Form 1099-MISC, except for reporting independent contractor payments. Businesses will still use Form 1099-MISC to report payments, such as rents and royalties, and miscellaneous income.

The biggest change to Form 1099-MISC happens to Box 7, which was previously used to report nonemployee compensation. Now, businesses should report direct sales of $5,000 or more in Box 7. 

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For more information on Form 1099-NEC, filing your 2020 tax returns, or any related matters, please contact your trusted Chugh CPAs, LLP professional.