Due Feb. 1, 2021: Form 1099-NEC for tax year 2020

Tax Law and News Form 1099

2020 has been a whirlwind of change, which meant adapting to new ways to shop, attend school, and work. Many of your clients have transitioned from working in an office to working at home, while others worked reduced hours or lost their jobs entirely. Many needed to pick up side jobs, gig jobs, sales jobs, or temp work. As a result, clients will likely have income from new sources, and some of them will receive Form 1099-NEC, Nonemployee Compensation, and file a Schedule C for the first time.

What is Form 1099-NEC?

Starting in tax year 2020, Form 1099-NEC will be used to report non-employee compensation totaling more than $600 in a year paid to a non-employee for certain payments from the trade or business. Previously, business owners would file Form 1099-MISC with an amount in box 7 to report non-employee compensation.

For tax pros who have been around for a while, you might be familiar with Form 1099-NEC; it was used until 1982 when the IRS added box 7 to Form 1099-MISC and discontinued Form 1099-NEC to simplify filing. 

What is reported on Form 1099-NEC?

If the following three conditions are met, clients can report a payment as non-employee compensation:

  1. They made the payment to someone who is not their employee (including parts and materials).
  2. They made the payment for services in the course of their trade or business (including government agencies and nonprofit organizations).
  3. They made payments to the payee of at least $600 during the year.

The IRS explicitly calls out cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, and payments to an attorney for professional service fees to be reported in box 1.

The separate instructions for filers/issuers for Form 1099-NEC are available in the 2020 instructions for Forms 1099-MISC and 1099-NEC.

When is Form 1099-NEC due?

If you prepare Form-1099s for any of your clients, the most significant change is the date the form is filed with the IRS. All 1099-NEC forms must be distributed to the recipients and filed with the IRS by Jan. 31 or the next business day, if the due date is on a weekend or holiday.  For tax year 2020, the form is due Feb. 1. Form 1099-MISC is still required to be distributed to the recipient by Jan. 31 and is due to the IRS by Feb. 28. By separating the due dates, the IRS effectively reduces confusion and hopes to combat fraud.

If the business fails to file on time, the penalty against the company varies from $30 to $100 per form ($500,000 maximum per year), depending on how long past the deadline the company issues the form. If a company intentionally disregards the requirement to provide a correct payee statement.

Comments (3) Leave your comment

  1. Hi Chrystal, thank you for the article on the new form.

    I’m confused about whether payments to attorneys for legal work should be reported on Box 10 of the 1099-MISC form or in Box 1 of the 1099-NEC form. Could you clarify please?

    Thank you.

    1. Hi Cheryl – thank you for your question.

      Payments to attorneys for legal service will be reported in box 1 of Form 1099-NEC.

      Payments for legal fees should be reported on Form 1099-NEC box 1. This would be any attorneys’ fees of $600 or more paid in the course of your trade or business. The IRS instructions that call out the term “attorney” includes a law firm or other provider of legal services.

      Gross proceeds, are amounts paid to attorneys as part of a settlement agreement and are reported in box 10 of Form 1099-MISC.

      Another nuance with attorneys and 1099s is that the exemption from reporting payments made to corporations does not apply to payments for legal services. Therefore, you must report attorneys’ fees (in box 1, Form 1099-NEC) or gross proceeds (in box 10, Form 1099-NEC) as described earlier to corporations that provide legal services even though that means that the attorneys’ fees are potentially reported twice.

      I hope this answers your question, thanks.

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