Got Contractors? Get Form 1099-NEC

If your business or organization pays contract workers (nonemployees) to render services, take note. The 2020 tax year brings reporting changes regarding nonemployee compensation (NEC) reporting.

NEC is money you pay to an independent contractor who is not considered an employee of your organization. Previously, NEC was reported on the 1099-MISC. Beginning in tax year 2020, however, all nonemployee compensation will instead be included on form 1099-NEC (which technically is an older form re-introduced for this purpose). In fact, a wide range of payments previously reported on the 1099-MISC will also now move to the new form.

Here’s a breakdown on what to report and how to report it.

What do I report on form 1099-NEC?

File form 1099-NEC for each person to whom your business paid more than $600 for services performed by someone who is not your employee. The following are some examples of payments to be reported in box 1 of this form:

• Professional service fees (attorneys, accountants, architects, contractors, engineers, etc.)
• Fees paid by one professional to another, such as referral fees
• Payment for parts or material used to perform the service if supplying the parts or materials was incidental to providing the service
• Compensation paid to independent contractors, including freelancers and gig workers
• Payment to nonemployees for entertainment services

Form 1099-NEC must be filed with the IRS and sent to each applicable recipient by Feb. 1, 2021.

What do I continue to report on form 1099-MISC?

Form 1099-MISC is not going away altogether. File this form for each person to whom you have paid the following during the year:

• At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
• At least $600 in:
  • Rents
  • Prizes and awards
  • Cash from a notional principal contract
  • Any fishing boat proceeds
  • Medical and health care payments
  • Crop insurance proceeds
  • Payments to an attorney (gross proceeds)
  • Nonqualified deferred compensation

The form 1099-MISC deadline is March 1, 2021 if filing by paper (March 31 if you’re e-filing).

What are some examples of when to use form 1099-NEC and when to use form 1099-MISC?

If you are in the restaurant business and you pay someone to preform landscaping services on your property, you should report this on form 1099-NEC.

Rent paid directly to the real estate owner for office space should be reported on form 1099-MISC.

If you rent a machine (for example, a bulldozer to level your parking lot), you should prorate the machine rental on form 1099-MISC and the labor of the machine operator on form 1099-NEC.

Payments made to a legal service provider should be reported on form 1099-NEC. However, any payment made to a law firm in connection with legal services but not directly related to the attorney’s services should be reported in box 10 on form 1099-MISC as “net proceeds.” This is applicable for legal services like a settlement agreement.

Regardless of the type of 1099 you use, remember you only need to complete it if the total amount paid for the tax year was $600 or more.

Are there any exceptions?

Yes. Generally, you do not need to complete form 1099 for payments made to a corporation.  For example, if you pay monthly rent to a real estate agent or a property management company, a 1099-MISC form isn’t necessary.

However, this exception does not apply for legal services. You should report any payments to attorneys of $600 or more on the applicable 1099 form.

There is also an exception for payments made to independent contractors via credit card or PayPal. These payments do not have to be reported on Form 1099-NEC.

An Additional Note

A new revision to the Protecting Americans from Tax Hikes (PATH) Act accelerated the due date for filing form 1099 from Feb. 28, to Jan. 31. This in turn eliminated the automatic 30-day extension for all forms that include NEC.

Given these changes, take a close look at your expenditures for contract-related work to make sure you’re using the correct forms. Your business tax CPA can help with this and other questions about proper documentation for nonemployee compensation.

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