If you are a business owner who has worked with subcontractors or freelancers, you’ve been using Form 1099-MISC to report your payments. Starting with the 2020 tax filing season, that will no longer be the case.
Instead, you’ll now be filing Form 1099-NEC.
WHAT ARE 1099 TAX FORMS?
This tax form reports the movement of money from one entity or person to another entity or person. But various 1099 tax forms report different types of income, the most common of which are indicated below:
- 1099-NEC – Nonemployee compensation
- 1099-MISC – Miscellaneous income (i.e. income derived from rents, royalties, health care payments…)
- 1099-INT – Interest income
- 1099-DIV – Dividend income
- 1099-R – Retirement income
- 1099-B – Sale of stocks or bonds
WHO NEEDS FORM 1099-NEC?
If you are a business owner who pays any unincorporated subcontractors or vendors $600 or more during the calendar year, you must issue a 1099-NEC to them.
Nonemployee compensation also includes fees, commissions, awards, and prizes.
WHEN IS IT DUE?
The due date for filing 2020 forms 1099-NEC with the IRS is February 1, 2021. This tax form must also be provided to the recipient by the same date.
WHAT DO I NEED BEFORE I CAN FILE THIS TAX FORM?
You will need to collect the subcontractor’s identifying information, so it is beneficial to collect that information from your independent contractors BEFORE paying them. The IRS provides form W-9, which you can find HERE, to help you get that information upfront with ease. Additionally, should the independent contractor provide you with fraudulent information, a completed form W-9 assures the IRS that you complied with the law.
WHY SHOULD I FILE IT?
First and foremost, it’s the law! If your income tax return is audited and the IRS discovers that you failed to issue and file any forms 1099-NEC, they will remove the deduction for those payments and those expenses will be disallowed. You will end up owing more taxes (including interest!) on that income.
You may also have to pay a substantial amount of money in penalties if you fail to file a correct form 1099-NEC by the due date (2/1/21) if you cannot show reasonable cause for not filing.
Generally, for 2020 forms 1099-NEC due in 2021, the penalty is $50 per form for filing less than 30 days late. The penalty increases to $110 if the form is not filed within 30 days of the due date and $270 after August 1, 2021. The maximum penalty for businesses is $3,339,000, if filed after August 1, 2021 or not filed at all, so be sure to issue and file all tax forms correctly and on time!
HOW DO I FILE IT?
You can file form 1099-NEC through the mail or electronically. If you would like expert help with filing this form or if you have any other tax questions or concerns, CONTACT US today!