Going with the Flow of the New 1099-NEC

The Just as everything seems to be changing in 2020, it’s only natural that we would have a new 1099 form to think about, as well.  So, let’s find out what the new version of the 1099 form is all about so that we can be ready to file taxes after the new year.  After all, going with the flow is what we’re all about this year.

Why a 1099?

Before we begin identifying the differences between the old 1099 and the new version, let’s explain why you are using a 1099 form. 

Now, you know that when you pay employees you must issue a W-2 at the end of the year. The W-2 shows the taxable wages, salaries, and tips you paid over the course of the calendar year.  The IRS will use that form to reconcile what your employee has paid in taxes versus what the employee owes, if anything. 

However, there is a chance that you have hired people who are not true employees of your company.  For example, perhaps you had a paint team come into the office to touch up the walls.  The paint team comes and goes, and while they update you on the progress of the task, they don’t actually report to you.  You do not provide them with the tools they need to do their job, either.  You are not technically their boss, so these workers are contract workers, and paid based on completion of the project.  Therefore, you cannot issue a W-2.  Rather, you will issue a 1099 instead.  Employers use the 1099 form for workers who are not employees of the company.

Previous 1099 Forms

Image of the previous version of the 1099-MISC.
Outdated version of form 1099-MISC

So, the 1099 is no stranger to change.  In fact, there are quite a few variations of the form, since the form was first introduced by the IRS in 1918—over 100 years ago!  Some variations of the form are more commonly used than others.  Still, each variation of the form has it’s own designated due date, specifications about who issues the form, and a minimum starting amount at which a company must start reporting payments.  In many cases, that amount is anywhere from $10 to $600.

This recent document update specifically pertains to form 1099-MISC, which reports miscellaneous income.  Until the recent update, the form included amounts businesses and non-profits payed to non-corporate U.S. residents, which we more commonly call independent contractors or contract workers.  Besides having multiple variations of the form, the IRS finds something to update on the form every so often.  That is how we ended up with this lovely new 1099-NEC form.  In reality, the IRS simply dusted it off from the collection of discontinued forms. The form was previously circulating, until the IRS halted it in 1982.  Now that the 1099-NEC is revived, we will no longer use the 1099-MISC to report payments to contract workers.

New 1099-NEC

Image of the current version of the 1099-NEC.
Current version of form 1099-NEC

The most noteworthy change of the new form is that the IRS has converted the NEC portion of the original 1099-MISC to its own form.  The new form is called the 1099-NEC.  This form, like the W-2 and 1099-MISC, are due to the contractor by January 31 of each year.

Specifically, the “NEC” stands for “non-employee compensation.”  Payment for these services had previously been reported in Box 7 of the 1099-MISC form, but they will now be reported in Box 1 of the 1099-NEC.  The important thing to know about this new form is that the IRS requires you to use the form for payments to nonemployees for services of $600 or more.  However, you may still issue the form for lower amounts.  The 1099-NEC has been reactivated for the 2020 tax year.

For your convenience, here are the items you will report on the new 1099-NEC versus what will remain on the 1099-MISC.

1099-NEC

  • payments to nonemployees for services rendered
  • attorney fees
  • accountant fees
  • architect fees
  • payments for parts and materials associated with services rendered
  • fee-splitting
  • commissions to nonemployee sales representatives
  • federal income tax withheld under the backup withholding rules
Current version of form 1099-MISC

1099-MISC

  • rental income
  • prizes and awards
  • royalties
  • payments in lieu of dividends
  • gross proceeds to attorneys
  • medical payments

Remember, you will no longer utilize Box 7 on the 1099-MISC form for any items listed under the 1099-NEC section above.

Obtaining a New 1099-NEC

Although most companies should already be prepared with the new 1099-NEC, there is a chance it fell through the cracks.  So, if you need the new form, you can get instructions and the print (PDF) version of the form at the IRS website.

Going with the Flow of the 1099

By now, you should be getting quite comfortable with change.  After all, 2020 has been a record year where change is concerned.  So, hopefully you feel comfortable with a new 1099 form as well.  The new 1099-NEC is really just Box 7 removed from the 1099-MISC form, and given it’s own personal document.  Just be sure you know which items you will report on both forms.  Lucky for you, the forms come with instructions, in case you have any doubt.  Now, just keep going with the flow of 2020, and hopefully you’ll arrive in tax season and the new year ready for some good things.

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