Should You be Receiving the New Form 1099-NEC?
The IRS has implemented new rules for the 2020 tax year requiring businesses to file a Form 1099 for any non-employee compensation (NEC) totaling more than $600 over the course of a year. The IRS has also created a new Form 1099-NEC for reporting business payments to non-employees who provide services, such as independent contractors and freelancers. Previously, those service providers had been issued a Form 1099-MISC.
The Breakdown Of The New 1099-NEC
Under these rules, most independent contractors who received more than $600 in NEC during 2020 for services must be issued a copy of the relevant Form 1099 by January 31 of 2021. Payments made for the services of an attorney must also be reported on the Form 1099-NEC. The Form 1099-MISC was also modified so that it no longer applies to most NEC payments. Payments made to a single independent contractor may be split between the two forms, therefore some independent contractors will receive both forms from one business.
One thing that has not changed with the implementation of the new rules is that businesses are still required to file copies of any Form 1099s they issue with the IRS to report non-employee payments. The information on the Form 1099s may be used by the IRS to ensure that individuals and businesses are reporting all of the income they have received.
Which Businesses Must Issue Form 1099s?
What is a Form 1099? Well, they are known as “information returns” and the IRS has issued several different versions of the form. But most independent contractors or freelancers only need concern themselves with the Form 1099-NEC and, in some cases, the Form 1099-MISC. Any individual or organization that operates as a trade or business must prepare a Form 1099 to reflect payments made to non-employees during the tax year. According to the IRS, an individual or organization is operating a “trade or business” if it one of the following:
- Operating for a gain or profit;
- A non-profit organization, such as a Section 501(c)3 organization;
- A trust of a qualified employer pension or profit-sharing plan;
- A non-exempt farmers’ cooperative; or
- A widely held fixed-investment trust.
Form 1099s only need to be sent for services provided to the trade or business, not for goods or merchandise that was purchased. Additionally, Form 1099s are not required when an individual purchases non-business personal services. For example, a business owner who hires an independent contractor for construction work on her home would not need to send out a Form 1099 reporting those payments.
Are You an Employee or Contractor?
Sometimes, there is some question as to whether an individual is serving as an independent contractor--such as a freelancer--or an employee. Employees will be issued a Form W-2 to report their earnings, while an independent contractor is issued a Form 1099. Since businesses who misclassify employees as independent contractors face still penalties if discovered by the IRS, most will make your status clear when you begin working for them and make a concerted effort to ensure that nothing is done to make you qualify as an employee in the eyes of the IRS.
As a general rule, a worker will be classified as an independent contractor if the following apply:
- The worker provides services to a number of customers who pay him or her directly for the service.
- The worker has control over how and when the work is performed.
- The worker receives payment when the project is completed, or when specific milestones are reached.
A worker will usually be found to be an employee if the following apply:
- The business controls what work is done and how it will be performed.
- The business provides the equipment and materials needed by the worker.
- The business provides employee benefits to the worker, such as time off and insurance.
- The business pays for supplies, insurance, and other job-related expenses for the worker.
What if I Don’t Receive my Form 1099?
An independent contractor will still be responsible for paying taxes on all income received during a year, regardless of whether the individual or business received a Form 1099 reporting those payments. The problem is usually resolved by simply reaching out to the business and ask for for a copy of the Form 1099 reporting the payment.
While it may be tempting not to report the income to the IRS if you have not received a Form 1099, it is generally a good idea to do so anyway. Just because it did not issue you a Form 1099, there is a good chance one was still submitted a Form 1099 to the IRS on your behalf. That means the IRS knows about that income and will expect you to pay self-employment taxes on it, regardless of whether you received the proper Form 1099 reporting that income.
Who Still Gets a Form 1099-MISC?
The Form 1099-MISC is still the general-purpose form the IRS uses for reporting payments made to non-employees who are not providing services. For tax years before 2020, Form 1099-MISCs for a tax year needed to be issued by February 28 of the subsequent year, but the deadline has been moved to January 31 to correspond with the filing deadline for Form 1099-NECs.
Payments of $600 or more must be reported on the Form 1099-MISC if they were for the following purposes:
- Medical or health care services, including payments to doctors, service providers, and suppliers;
- Payments to an attorney for non-legal services, such as lawsuit settlements (for further explanation, see below);
- Miscellaneous income, such as termination payments owed to some types of independent contractors;
- Rent payments to rent or lease office space;
- Machine rentals; and
- Prizes and awards.
However, the $600 annual minimum for filing a Form 1099-MISC does not apply to certain types of payments made by a trade or business. Those payments include:
- Royalties of more than $10 during a year;
- Direct sales of at least $5,000 of consumer products to a retail buyer who does not sell the products at a permanent retail establishment; and
- Backup withholding.
Generally, payments made to corporations, including limited liability companies (LLCs) taxed as corporations, do not need to be reported on a Form 1099-MISC. Additionally, payments for such things are merchandise, storage, freight, or other similar items do not need to be reported.
IRS Has Special Form 1099 Rules for Attorneys
The IRS issued specific instructions for reporting payments to attorneys, law firms, and legal services. The IRS said that payments made to a non-employee for any legal services made during the course of a trade or business--whether by an attorney or other legal staff--must be reported on a Form 1099-NEC if they total more than $600 during the year.
However, the IRS explained that some types of payments to attorneys or law firms are considered “gross proceeds” must still be reported on Form 1099-MISC if they total $600 or more. It said that gross proceeds include the following:
- Payments to an attorney that are not for the attorney’s services, but are connected to legal services. For example, payments to an attorney to resolve a dispute under a settlement agreement would be reported on the Form 1099-MISC.
- Any other attorney payments that are not reported on the Form 1099-NEC.
Finally, the IRS says that attorney fees paid to a “claimant” (usually the plaintiff) need not be reported on a Form 1099. For example, if a business paid the other party’s attorney $50,000 as part of a lawsuit settlement, the business would not need to report that payment.