Form 1099-NEC For The Tax Year 2020-2021: A Comprehensive Guide

A Comprehensive Guide To Understanding Form 109-NEC

Here’s your ultimate guide to understanding the what, why, and how of Form 1099-NEC for the tax year 2020-2021.

As the year comes to an end, businesses are preparing to wrap up the tragic rollercoaster ride that 2020 has been, and look forward to a much more hopeful and less-challenging start in 2021.

If you are fortunate enough to come out of this long, never-ending, “new normal” unscathed, then you truly are lucky. Research shows that nearly 100,000+ businesses were forced to close “temporarily” as the Covid-19 global pandemic was at its peak during March. 

As businesses were still adjusting and getting used to the “new normal”, the IRS threw in a big surprise in September 2020 by reintroducing Form 1099-NEC and abolished the automatic 30-day extension for all 1099 forms.

The new form is about to change the way businesses have been reporting their incomes and expenses to the IRS for the past few years.

So, in this blog, we will help you understand everything there is to know about the form 1099-NEC by taking you through its origin, the reasons why the IRS decided to introduce it this year, and how it would help fight certain corrupt tax practices in the country.

We would also discuss other important aspects, such as available options to file the 1099-NEC for this tax year and the repercussions of noncompliance. 

So, sit down, get comfortable, grab a cup of your favorite hot beverage, and let’s get started. 

If you do not have the time to read through the whole article, you can just click on the important links below to skip to the sections that seem relevant to you. 

Quick Links

What Is Form 1099-NEC? 

1099-NEC is the latest business tax form added to the 1099 form series in 2020. It exclusively deals with nonemployee compensations. 

If your business has made any payments to an independent contractor for their services, then such payment is deemed to be a payment made to a non-employee individual.

We will compare and understand the differences between employee and nonemployee compensations later in this blog. For now, just keep in mind that if you own a business, and you have made payments to someone who is not an employee of your organization, but this ‘someone’ is a self-employed individual, then such payments are called “nonemployee compensations.

The IRS requires all businesses, regardless of their organizational status, to report all nonemployee compensations made to independent contractors or freelancers or vendors in the Form 1099-NEC, starting with the tax year 2020-2021.

Please note that personal payments don’t have to be reported here. 

Confused?

Here’s a tabular representation of different kinds of payments and incomes to help you understand the difference better.

Difference Between Nonemployee Compensations, Personal Payments, And Employee Compensations

Nonemployee Compensations
(Must Be Reported in Form 1099-NEC)
Employee Compensations
(Don’t Report in Form 1099-NEC)
Personal Payments
(Don’t Report in Form 1099-NEC)
* Your business paid $600 to a freelance logo designer. 

* Your business paid fees to a lawyer for helping you with a legal case.

* Your business paid $1000 to a freelance writer to write blogs for you.
* Your business paid wages to your employees. 

* Your business paid Workers’ Compensations to your employees.

* Your business paid the health insurance premium for your employees.

* You paid your friend Jack, $1000 to help him get out of a debt.

* You gifted your sibling a $750 check.
 
* You paid $1200 for your friend’s car repairs.


Difference Between Nonemployee Compensations, And Employee Compensations.

Why Did The IRS Introduce Form 1099-NEC For The Tax Year 2020?

Originally, the 1099-NEC form was introduced in 1979 to report nonemployee compensations (which is its original purpose to this day).

 However, to reduce the complications in the filing procedures and to have all businesses accurately report their miscellaneous incomes and payments in one place, Form 1099-MISC was used.

Since businesses were not planning on evading taxes (not as much as some businesses are evading today), the form 1099-MISC helped both the IRS and the business taxpayers to file incomes and payments pretty accurately and keep track of the filings, respectively. 

However, things changed dramatically over the past few years. As businesses grew and made more profits, the tax slab was cut down from 35% to 21% to help them comply with the IRS. 

However, this tax cut did not stop mega companies from hiding their true incomes from the IRS. According to Forbes, at least 7 million taxpayers failed to file their taxes in 2013 alone, which resulted in $28 billion in losses to the US government.

Further, businesses started to find loopholes, such as employee misclassification to cut down on tax that they owed to the U.S. government.

These corrupt practices not only affect the accuracy of the filings but resulted in American employees being robbed of certain employee rights and benefits.

By dismantling the very loophole that allowed business taxpayers to misreport their incomes and payments, the IRS decided to take control of the situation by re-introducing Form 1099-NEC.

Now that there’s a form that is dedicated to conveying the payments that businesses are making to independent contractors, the IRS can keep tabs on the factual information or the lack thereof.

Form 1099-NEC Eliminates The Automatic 30-Day Extension

Previously, business taxpayers were allowed an automatic 30-day extension for all 1099 forms. This gave businesses enough time to file the 1099-MISC and other forms.

You see, 1099-MISC had two due dates, one for paper-filing, which falls at the end of February, and the other for e-filing, which falls at the end of March. And if a business is filing more than 250 1099-MISC Forms in total, then the business has to e-file them.

But this extension alone is not the problem. 

Another important form, called “W-2”, which deals with employee compensations is supposed to be submitted by the end of January of the tax year.

The problem? 

The employee compensations are being filed, taxed on, and returned, even before the 1099-MISC forms were being filed. This created room for a lot of corrupt tax practices that we discussed earlier. 

Now, with the PATH Act, P.L. 114-113, Div. Q, sec. 201 abolishing the automatic 30-day extension for all 1099 forms, the IRS plans to monitor the employee compensations, nonemployee compensations, incomes, and payments that are being reported by the business taxpayers– all at once.

Changes To Form 1099-MISC (Box-7) Due To Form 1099-NEC

Businesses are used to reporting their miscellaneous payments and incomes through form 1099-MISC. However, with the re-introduction of the form 1099-NEC, business taxpayers are trying to figure out the changes made to form 1099-MISC.

One of the major updates to form 1099-MISC is the removal of Box-7, which deals with nonemployee compensations. This resulted in the revised Form 1099-MISC, which no longer has the nonemployee compensations field.

All the nonemployee compensations that were previously reported in Box-7 of the Form 1099-MISC should now be reported in 1099-NEC, which is the new form that exclusively deals with nonemployee compensations.

Any payments made to independent contractors, such as service charges, fees, contractual payments, and more were previously reported in Box-7. But, now, such payments are to be reported in Form 1099-NEC.

In a nutshell, if your business made any payments to independent contractors amounting to $600 or more, then such payments must be reported in 1099-NEC.

We will further discuss the particulars of what should be included in Form 1099-NEC in a bit. 

Or you can skip to that section here.

What Is The Difference Between 1099-MISC And 1099-NEC?

1099-MISC deals with any miscellaneous payments that businesses have made during the tax year in the course of business or trade.  1099-NEC deals with nonemployee compensation, if your business made any payments to independent contractors amounting to $600 or more, then such payments must be reported in 1099-NEC.

Difference Between Form 1099-MISC and 1099-NEC

Form 1099-MISCForm 1099-NEC
* Does not deal with nonemployee compensations anymore* Deals with nonemployee compensations specifically
* Deals with miscellaneous payments such as rent, prizes, royalties, and more. * Deals exclusively with nonemployee payments, such as service charges, fees, contract payment, and more. 
* Must be filed if aforementioned payments have been made.* Must be filed only if nonemployee compensations have been made.

What Kind of Payments Must Be Reported in Form 1099-MISC?

  • Rent 
  • Royalties 
  • Other incomes 
  • Federal income tax withheld 
  • Fishing boat proceeds 
  • Medical and health care payments 
  • Payer made direct sales totaling $5,000 or more of consumer products to the recipient for resale
  • Substitute payments in lieu of dividends or interest
  • Crop insurance proceeds
  • Gross proceeds paid to an attorney
  • Fish purchased for resale
  • Section 409A deferrals
  • Excess golden parachute payments
  • 4 Nonqualified deferred compensation
  • State tax withheld

If you want to learn in detail how to fill your form 1099-MISC (download here), we suggest checking the instructions here.

What To Report On Form 1099-NEC?

Businesses are required to report any nonemployee compensations made through the course of business in the tax year.

For example, if you have paid a freelance blog writing specialist to write an article for your business requirement, then this transaction is considered to be a payment made to a ‘non-employee’ of your entity. And so, it will be treated as nonemployee compensation.

The key rule is that nonemployee compensations must be reported only if the amount paid to the independent contractor or vendor is $600 or higher.

Note: As a general rule of contractual transactions, businesses withhold a certain amount from the payee until the payee provides the necessary information, such as Taxpayer’s Identification Number to the payer.

If your business withheld such an amount from the payee, then such an amount must also be reported in Form 1099-NEC.

What Kind of Payments Must Be Reported in Form 1099-NEC? 

  • Nonemployee compensation
  • Payer made direct sales totaling $5,000 or more of consumer products to the recipient for resale
  • Federal income tax withheld
  • State tax withheld

Please note that personal payments do not have to be reported in this form.

Who Must File Form 1099-NEC?

All business taxpayers must file 1099-NEC if any of the following apply to them. 

  1. If you have made a payment to an independent contractor ( individual, estate, corporation, or partnership) who is not your employee 
  2. If you have made a payment amounting to $600 or more
  3. If the payment was made for the service that you utilized during the tax year
  4. If the payment was made during the course of your business or trade 

The IRS uses this information to check if the recipients have reported the same correctly. This is why in addition to specifying the amount paid, you must also report the recipient’s TIN in the 1099-NEC form. 

Please note that a copy of this form must also be sent to your payee/recipient to make sure that there are no discrepancies.

How To Fill Out 1099-NEC Boxes?

Contrary to what most businesses believe, filing and filling your 1099-NEC form is not that hard. Even if you do not have a full-time accountant by your side, you can do this yourself with very little intervention. 

Having said that if you have to report multiple payments, and the amount exceeds 3 figures, and you do not have all the necessary information to fill your form, it’s best to assign the job to someone who is qualified to do the job. 

Form 1099-NEC only has 7 boxes in total, which require precise information to be reported to the IRS. The form also has a section dedicated to the personal information of the filer, such as the name, address, TIN, and other general fields. 

So, let’s understand how to fill the boxes in form 1099-NEC.

Box 1:  Nonemployee Compensation 

If you have made any payments greater than or equal to $600 to an independent contractor or vendor, then such payments must be reported here. Enter the total sum of the nonemployee compensations you have paid. 

Box 2:  Payer made direct sales totaling $5,000 or more of consumer products to recipient for resale (reserved)

This field is reserved for the tax departments and the IRS.

Box 3: (reserved)

This field is reserved for the tax departments and the IRS.

Box 4: Federal Income Tax Withheld

You must use this box to enter backup withholding information. As previously discussed, if your vendor or payee did not provide the TIN and other vital information, then you can consider the payments due to that vendor or payee as backup withholding and enter the amount here.

Payments Considered For Backup Withholding 

  • Service fees paid to attorneys 
  • Service fees paid to accountants, architects, contractors, engineers, and more 
  • Service fees paid to organizations 
  • Split-fee or referral fees
  • Payments made by attorneys to witnesses or experts in legal adjudication

Box 5: State Tax Withheld 

If you have withheld any state tax from your payee, then such an amount must be reported here.

Box 6: State/Payer’s State Number

Use this field to enter your state’s abbreviated name and your state identification number.

Box 7: State Income 

Enter the amount of the state payment in this box to report to the IRS.

Where Do You Send Form 1099-NEC?

If you are not sure where to send your tax forms so that they safely reach the IRS, then make sure that you choose any one of the following filing methods.

Paper Filing

This is a traditional filing method used by millions of taxpayers in the U.S. It requires you to download the forms online, report the information as required, postmark the filing according to state and federal guidelines, and then finally address it to the office of the IRS. 

Currently, there are three main addresses, to which you can send your filings according to your principal business address.

If your principal business, office or agency, or legal residence in the case of an individual, is located hereThen You Must Use This Address 
Alabama, Arizona, Arkansas, Delaware, Florida, Georgia, Kentucky, Maine, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Texas, Vermont, VirginiaDepartment of the Treasury Internal Revenue Service Center Austin, TX 73301
Alaska, Colorado, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, WyomingDepartment of the Treasury Internal Revenue Service Center P.O. Box 219256 Kansas City, MO 64121-9256
California, Connecticut, District of Columbia, Louisiana, Maryland, Pennsylvania, Rhode Island, West VirginiaDepartment of the Treasury Internal Revenue Service Center Ogden, UT 84201
Where Do You Send Form 1099-NEC?

Special Note

If your legal residence or principal place of business, or principal office or agency, is outside the United States, then you must use the following address.

Address

Department of the Treasury Internal Revenue Service Center Austin, TX 73301.

Learn more about the general instructions to paper filing here directly from the IRS.

e-Filing 

If you are approved to file electronically, then you can do so with FIRE, an initiative by the IRS to facilitate electronic filings for taxpayers. If you have more than 250 1099-NEC forms to report, then you must e-file.

Learn more about the general instructions to e-filing form 1099-NEC here.

So, if you plan on e-filing, make sure that you get the approval for e-filing by sending an application for Filing Information Returns Electronically (FIRE).

The biggest obstacle for e-filing is that your computer must have the necessary software that enables TCC (Transmitter Control Code). This software produces the files in a proper format for filing, and without it, it’s next to impossible to e-file your forms, even with FIRE. 

But don’t worry. Not everything is gloomy here. 

Thankfully, there are alternatives to filing your forms electronically, such as Tax1099 that help you to easily file your forms electronically without any hassles. We will get to that topic in a bit. 


Or you can skip to that part here.

What You Need To Include On Form 1099-NEC?

While filling out Form 1099-NEC, it is absolutely essential to include the following information to help IRS recognize your business and its filings accurately.

  1. Payer’s name 
  2. Payer’s address
  3. Payer’s telephone number 
  4. Payer’s TIN
  5. Recipient’s TIN
  6. Recipient’s Name 
  7. Street address (including the apartment number)
  8. City or town, state or province, country, and ZIP or foreign postal code

Account number (according to the instructions here)

Form 1099-NEC & State Filing

Since Form 1099-NEC is not covered under the CF/SF program, the states are required to release certain guidelines to business taxpayers operating within these states. 

25 states have announced the guidelines for e-filing Form 1099-NEC in 2020 so far.

Check State-Wise 1099-NEC Specifications

State-Wise Form 1099-NEC Specifications
Colorado
Georgia
Hawaii
South Carolina
Virginia
Arizona
Arkansas
D.C.
Delaware
Indiana
Iowa
Kansas
Kentucky
Maryland
Mississippi
Missouri
Nebraska
New Jersey 
North Carolina
Oklahoma
Oregon
Pennsylvania
Vermont
West Virginia
Wisconsin
State 1099-NEC Specifications.

Form 1099-NEC Due Dates For 2020

Form 1099-NEC along with other 1099 forms has to be submitted to the IRS on or by the 31st of January 2021. However, this date falls on a weekend. So, the succeeding business day, which is the 1st of February 2021, is the deadline. 

Be sure to submit your forms to the IRS (postmark them before sending them out) on or by the 1st of February 2021.

Requesting an Extension 

If you miss the deadline, the IRS holds you accountable and penalizes you with fines and interest as applicable to your particular case. It is advised to comply with the IRS and file your forms before the due date because the penalty for non-filing is usually higher than not paying the tax owed. 

Note: if you miss the due date for inevitable reasons, you may request the IRS for an extension.

However, the approved extension does not allow you to e-file your forms, so you have to paper file your tax forms to the IRS. 

How to File Form 1099-NEC For 2020 Using Different Methods

Business taxpayers are required to file their tax forms to the IRS by choosing any of the following filing methods. 

1. Paper Filing 

Like we discussed earlier, paper filing is the traditional filing method, which requires you to download forms, print, fill, file, and address them according to the state guidelines to the IRS. 

You can request for Form 1099-NEC here directly from the IRS and they will send the forms to your registered email ID. These forms can be printed and filled. Make sure that you do not fold these forms when you send them via USPS as they are scannable. 

2. e-Filing

You can use the FIRE (Filing Information Returns Electronically) program to e-file your forms. However, you need to be approved by the IRS to use this service. So, you have to send an application (Form 4419) to the IRS (paper filing) to get approval for e-filing your forms. Just make sure that you send the e-file request approval forms at least 30 days before the deadline. 

If you are bulk filing, the IRS recommends and requires you to e-file your forms all the more. 

If you’re planning on filing electronically, your computer must have the software required to support FIRE. This software allows you to download and submit the forms in proper formats. The reason IRS is asking payers to use this software is that it does not accept PDF or other file formats for e-filing. 

Learn more about applying for e-file approval here and find the details about e-file approval here.

However, the approved extension does not allow you to e-file your forms, so you have to paper file your tax forms to the IRS. 

You can apply for an extension for certain forms with the updated Form 8809. You can check the instructions here.

e-File Form 1099-NEC Using Tax1099

The above methods may seem complicated because of their complex procedures and turnaround time. But, we have something in store for you that will not just make the whole process of filing your tax forms a million times easier, but it will cut down on cost, resources, and time by at least 50%.

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With over 40 ready-to-file forms available on Tax1099’s form directory, you can create your forms, verify the information, and e-file the forms to the IRS in just a few minutes. Sign Up Now.

No more hassles. No more software installations. 

Tax1099 does not charge you anything until you decide to submit your forms to the IRS. And when you do, each form will cost you as little as $0.55. 

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Tax1099 Integrations & API

E-Filing is made extremely simple with Tax1099. With dynamic integrations, such as QuickBooks, Entrata, Excel, Fresh Books, and more, you can easily sync your accounting and vendor data to Tax1099’s secure server, which automatically fills the forms appropriately. 

Our API integration allows business taxpayers to bulk file their forms. We will coordinate with your developers and everything is pretty much-taken care of from there. 

With enhanced security and interface features, you can e-file your forms with Tax1099 in just 3 easy steps.

How To e-File With Tax1099 In 3 Easy Steps

Create your free Tax1099 account to get started. 

Step 1: Create a form and enter the information

Step 2: validate the information entered  

Step 3: e-File your tax forms to the IRS securely

When we say that Tax1099 is compliant with the IRS, we also mean that it is secure, and follows the security protocols required for a safe e-file transaction.

While filing your tax forms is not the easiest task, there are ways, such as using Tax1099 that make the overall process easy. You can make use of the afore-mentioned methods to start your New Year with a less-challenging tax season. 

The re-introduction of the form 1099-NEC is a significant change to the overall tax system. While the minute procedures may seem complex, the overall result, which is to help the IRS to spot the bad apples and help rectify the loopholes, is something that business taxpayers should approach responsibly. 

In a way, by complying with the new guidelines and procedures, you are contributing to making the U.S economy less corrupt, and facilitating accurate fiscal statistics. 

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