If you are a gig worker or running a small business, then you might have been receiving or issuing 1099-MISC till 2019.
However, in 2020 you may have received or issued Form 1099-NEC instead of 1099-MISC. You probably wonder why Form 1099-MISC is replaced by Form 1099-NEC. Here is everything essential for you to know about the new 1099-NEC Form.
What is Form 1099-NEC?
1099-NEC is a Nonemployee Compensation (NEC) form that requires businesses to report the income of independent contractors, freelancers, and self-employed individuals. Previously these people had been receiving the 1099-MISC Form.
You will be surprised to know that Form 1099-NEC was introduced during the era of President Ronald Reagan in 1980. However, the IRS added a new box in the existing 1099-MISC Form to report the payment made to self-employed people. So, Form 1099-NEC was no longer needed.
But it created confusion among the tax community. Because businesses were required to report payments on two different deadlines. On the one hand, they were bound to send 1099-MISC to self-employed people they did business with by 31st January. On the other hand, the same Form needed to be sent to all the payees by 28th February.
Due to these two different due dates, many cases for non-compliance were registered. To remove this confusion, the Internal Revenue Service (IRS) announced in 2020 to reintroduce Form 1099-NEC.
But it does not mean that Form 1099-MISC is null and void now.
Form 1099-NEC Vs. 1099-MISC
Form 1099-NEC differs from 1099-MISC in only one distinctive way.
Form 1099-NEC is used by businesses to report the independent (nonemployees) contractor income.
On the contrary, Form 1099-MISC requires businesses to report miscellaneous income like awards, rent, or payment to an attorney.
Who Requires Form 1099-NEC?
A self-employed person is subject to receive Form 1099-NEC if he gives their services worth at least $600 to a third party as a trade or business. But 1099-NEC is not required if the contractor is registered as a C corporation or S corporation.
Similarly, if the services are given on a personal scale, then form 1099-NEC is not applicable.
For instance, you are a self-employed electrician, and your neighbor calls you to fix his electric appliance for $1000 in 2020. Since your neighbor is not a business and you give your services on a personal basis, then your neighbor will not be required to send you to form 1099-NEC.
Nonetheless, if your neighbor runs a business, namely XYZ Traders, and hires you for electric work of building worth at least $600, then he will send you 1099-NEC.
Who requires Form 1099-MISC?
If your business pays an individual or a Limited Liability Company (LLC) at least $600 in rent, prize awards, legal settlements, or medical payments, then you are required to file1099-MISC Form.
How to File Form 1099-NEC
For each 1099-NEC Form, 2 copies are required to be reported with the same information: copy A and copy B.
Copy A is for the IRS, whereas copy B is to be sent to the contractor.
It must be noted that only the payer is responsible for filing Form 1099-NEC.
In order to file Form 1099-NEC, you should request a Form W-9. It will include the following information about the contractor:
1- Document ID name and business name (if applicable)
2- Current address
3- Business entity
4- Text identification number.
Submit Copy A to IRS
There are two ways to submit copy A to the IRS.
1- File Physically:
The first method allows you to send it by mail. A hard copy can be obtained through the IRS website. But you also need form 1096 as a cover sheet. On completing both forms, you are eligible to send them through the mail.
2- File Electronically:
You can file electronically using the IRS FIRE (Filing Information Returns Electronically) system.
However, you will need two things:
- Proper Format file
- Transmitter Control Code (TCC)
former requires a software or service provider to format the file in acceptable Form because scanned or PDF copy is not acceptable by IRS
Latter needs you to get a code through mailing Form 4419 to IRS at least 30 days before the due date of filing Form 1099-NEC.
Send Copy B to Contractor
You can send copy B to the contractor either physically or through email. However, you must comply with IRS rules to obtain the contractor’s consent before sending them a copy of the file. If the consent is not obtained for any reason, you have to send the contractor’s copy via mail.
Deadline for Filing Form 1099-NEC
The due date for filing the Form 1099-NEC is 31st January of the year following the applicable tax year. If 31st January falls on a holiday, then the next business day is considered the deadline for filing Form 1099-NEC.
Deadline for Filing Form 1099-MISC
There are two separate deadlines for filing a 1099-MISC form. If you are filing it by paper, the due date is 1st March. In contrast, the deadline is 31st March if you file it electronically. If the last date falls on a holiday, then the next business day will be considered the last day.
Penalties for Missing the Deadline
You have to pay the following penalties if you miss the deadline:
1- $50 if you file within 30 days after missing the deadline
2- $100 if you file more than 30 days late but before 1st August
3- $260 to file on or after 1st August
You can request an extension by filing Form 8809 to the IRS if you don’t manage to submit the 1099 forms on time. Nevertheless, you need to furnish a copy of the 1099-NEC Form to your contractor by 31st January.
In short, Form 1099-NEC is for payments made to independent contractors. And Form 1099-MISC is for reporting miscellaneous payments. If you are having any difficulty filing the 1099 forms, you can avail the services of a myNITS advisor with only one phone call.