If you pay any independent contractors for their services, the IRS recently made a change that will probably affect you: starting with the 2020 tax year, instead of reporting nonemployee compensation (NEC) via Form 1099-MISC, you must complete and file Form 1099-NEC by January 31, 2021 (or the next business day).
It’s a relatively small change, but you could pay penalties if you file the wrong form or don’t give your contractors the correct statement, so it’s important you get this right. Below, we break down why the IRS made this change, how to fill out Form 1099-NEC, and whether your state may have specific requirements.
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Why do I have to report NEC using Form 1099-NEC now?
Form 1099-NEC isn’t a new form, but it hasn’t been used since 1982. The IRS decided to bring it back for the 2020 tax year to reduce confusion—between 1982 and 2019, you’d report the compensation of any non-employee contractors using Form 1099-MISC, but that form can also be used to report a variety of payments, some of which have separate filing deadlines. By moving nonemployee compensation (NEC) to its own form and a single filing deadline, it makes it easier for you to know exactly when to file.
How will this change from Form 1099-MISC to Form 1099-NEC affect me?
Prior to tax year 2020, if you paid nonemployees (such as independent contractors) at least $600 in a calendar year for their services in the course of your trade or business, you reported the amount in Box 7 of Form 1099-MISC.
Now, you’ll complete and file Form 1099-NEC to report nonemployee compensation and give a copy to your contractors so they can report the amount on their tax return. The filing process may be a bit different than you are used to, but we’ll walk you through the form and process below.
Note: You’ll also need to submit a Form 1096 to the IRS to summarize all the 1099-NECs you sent to contractors.
The deadline to file Form 1099-NEC and provide a copy to your contractor is January 31—or the next business day if January 31 falls on a weekend or holiday. For example, since January 31, 2021 falls on a Sunday, the deadline for 2021 is February 1.
Another important change: You will likely have to file Form 1099-NEC with both the IRS and with your state. Prior to tax year 2020 (when you submitted Form 1099-MISC to the IRS) the IRS would send it to the 30 states participating in the IRS 1099 Combined Federal/State Filing Program, which meant that employers with businesses operating in those states would not have to file separately with their states. However, Form 1099-NEC is not part of this combined program. This means if the state requires a copy of the 1099-NEC, you need to file the form directly with your state as well. Certain states have released state-specific guidance around the 1099-NEC form; we list those in detail in a table below.
Keep in mind that 1099-MISC isn’t going away completely. You’ll still use it if:
- You paid at least $10 in royalties or broker payments instead of dividends or tax-exempt interest to another individual.
- You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
- You paid anyone at least $600 in:
- Prizes and awards
- Other income payments
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
- Any fishing boat proceeds
- Medical and health care payments
- Crop insurance proceeds
- Gross proceeds to attorneys from lawsuits
- Section 409A deferrals
- Non-qualified deferred compensation
Note: If you do need to submit Form 1099-MISC for any of the above situations, make sure you fill out and submit the latest version. When the IRS reintroduced Form 1099-NEC, they also rearranged some of the box numbers on Form 1099-MISC.
How does this change affect those who work for me?
Since this change applies to how you report nonemployee compensation, it will have no effect on your full-time employees. You’ll still fill out and give them a copy of Form W-2 as usual.
However, if there are nonemployees (like independent contractors) who work for you, this will have a minimal effect on them. If you’ve paid (or will pay) any nonemployees at least $600 by the end of 2020, they’ll receive a 1099-NEC instead of a 1099-MISC for their income in 2020. While they won’t be taxed differently, they’ll use this new form to calculate their income taxes for the year. 1099-NEC looks similar to 1099-MISC, but it’s formatted slightly differently.
Not sure whether your worker is an employee or independent contractor? We break down the differences below in the section titled: How do I fill out Form 1099-NEC?
What if I give contractors the wrong form?
You could face a penalty for each form you file past the due date—and a separate penalty for failing to provide the correct statement to the recipient (for example, if you send a 1099-MISC when you should’ve sent them a 1099-NEC).
The penalty amount is determined by when you file the correct information, return, and submit the correct statement to the payee—the longer it takes you to submit the correct form, the higher the penalty.
For example, if your business has gross receipts of $5 million or less, you’d pay $50 per late Form 1099 filed within 30 days of the due date. For 1099s filed over 30 days late but before August 1, you’d pay a $110 penalty per return. States can also assess penalties, so the total amount can quickly add up.
If you make a mistake, you can’t just file a new Form 1099-NEC and assume the IRS will know which one is the correct form. It’s critical to follow the steps below for fixing incorrectly filed forms:
If you filed a 1099-MISC when you needed to submit a 1099-NEC
First, void the original Form 1099-MISC. To do this, fill out a new Form 1099-MISC and enter an X in the CORRECTED box at the top of the form. Enter all the information exactly as it appeared on the original incorrect form, but enter 0 (zero) for all money amounts.
Next, prepare a new 1099-NEC and enter all the necessary information. Do not enter an X in the CORRECTED box. Prepare a new Form 1096 transmittal form, and file the Form 1096 and Copy A. Do not include a copy of the original form that was incorrectly filed.
If you made a mistake on your 1099-NEC form
If you want to fix a mistake after filing Form 1099-NEC, you must complete and issue a correct 1099-NEC and other required forms. Check with the IRS, as the steps may vary depending on the type of correction you want to make, but in general:
- If you originally filed on paper, you should correct it as soon as possible and file Copy A of Form 1099-NEC and Form 1096 with the IRS. Then, send statements to the recipients showing the correction. When making a correction, complete all information.
- If you originally filed electronically, re-file the forms that require corrections (not all forms you originally e-filed) and give corrected statements to recipients as soon as possible.
If the IRS sends you a notice before you realize you made a mistake, the notice will typically tell you exactly which form you need to file to fix your mistake. They will also give you a deadline for when you need to take such steps, so it’s best to respond as soon as possible.
How do I fill out Form 1099-NEC?
Form 1099-NEC is relatively short and straightforward. There are five main sections:
- The payer (your business)’s information
- The recipient (your contractor/nonemployee)’s information
- NEC amount (remember: this’ll usually be over $600, although you also need to file Form 1099-NEC for anyone you withheld federal income tax for under backup withholding rules—even if it’s less than $600)
- How much federal income tax you withheld (this’ll usually be $0 unless you have a backup withholding order from the nonemployee)
- State-specific information.
The main box to pay attention to is Box 1, where you’ll put the total amount you paid the contractor over the previous year.
How do I file Form 1099-NEC?
You can either file 1099-NEC electronically with the IRS using the IRS FIRE system, or you can mail it to your local Department of the Treasury Internal Revenue Service Center.
State-Specific Guidance for Form 1099-NEC
Filing Form 1099-NEC with the states may be different than you are used to, though.
As we mentioned above, many who used 1099-MISC in the past did not have to file separately with their state. However, that has changed with the 1099-NEC.
To understand your specific requirements, check with the state tax or revenue department where: 1) your business is established, 2) your contractor resides, and 3) the services were performed.
Here are some important questions to ask:
- Are you required to file a 1099-NEC directly with the state?
- Is there a mandatory e-file requirement that applies to you?
- When is the state filing deadline?
- Are there any state-specific forms that need to be submitted for nonemployee compensation?
- What are the requirements if your contractor lives in one state but performed the services in another state? (If you’re trying to understand how to navigate this better, see this state-by-state guide.)
|State||State-specific instructions for filing the 1099-NEC|
|Arizona||Arizona 1099-NEC filing instructions|
|Delaware||Delaware 1099-NEC filing instructions|
|Indiana||Indiana 1099-NEC filing instructions|
|Iowa||Iowa 1099-NEC filing instructions|
|Kansas||Kansas 1099-NEC filing instructions|
|Kentucky||Kentucky 1099-NEC filing instructions|
|Maryland||Maryland 1099-NEC filing instructions|
|Missouri||Missouri 1099-NEC filing instructions|
|Nebraska||Nebraska 1099-NEC filing instructions|
|New Jersey||North Jersey 1099-NEC filing instructions|
|North Carolina||North Carolina 1099-NEC filing instructions|
|Oregon||Oregon 1099-NEC filing instructions|
|Washington D.C.||Washington D.C. 1099-NEC filing instructions|
|West Virginia||West Virginia 1099-NEC filing instructions|
At Gusto, we know any change that affects your business can feel stressful. That’s why we take care of filing Form 1099-NEC for you. Plus, we make it easy to print and mail your contractors their copy. Learn more about how Gusto makes it stay compliant while running your business—not just during tax season, but year-round.