What’s The Difference Between A 1099-NEC And A 1099-MISC?
Before we discuss the new 2020 changes to the Form 1099 and the variations thereof, we need to explain what the form is. The 1099 is a federal income tax form for businesses to report financial transactions that happened over the course of the year being reported on. Specifically, the form is used to report someone’s earnings that were not wages, salary, or tips. Those are done on a Form W2, which is meant for employees. The 1099 is for independent contractors.
Let’s Go Over Box 7
On the Form 1099-MISC, there is a Box 7 entitled, Nonemployee Compensation. As an employer, you would use this box to report any money given to self-employed workers or independent contractors.
If you have used this box or will use it, pay attention here: as of 2020, if you paid out more than $600 to someone who is not your employee (for example, an independent contractor), then you will have to also file the new form 1099-NEC (nonemployee compensation).
Why Is There A New Form?
The answer to this goes back to 2015 when the Protecting Americans from Tax Hikes (PATH) Act was passed. In short, the PATH Act protected taxpayers against fraud. Why does this have anything to do with a 1099 Form?
Here’s why: Because of the PATH Act, different parts of the 1099 became due at different times. The amounts being reported in Box 7 became due by January 31st. The rest of the form wasn’t due until February 28th (for paper submissions) and March 31st (for e-filing).
The amount being reported will go in Box 1 of the 1099-NEC.
The form was no longer an effective means of reporting. The solution was to bring back an old, discontinued tax form, the 1099-NEC. If you would have reported more than $600 on Box 7 on the 1099-MISC, you now have to do so on the 1099-NEC, and it is due on February 1, 2021.
To be clear, the form will normally be due on January 31st, but in 2021, that date happens to land on a Sunday. In 2021, the new 1099-NEC will need to be submitted—either by paper or electronically—on the following Monday, February 1, 2021.
This form was created due to the deadline being January 31st. That said, if you request an extension, you are not guaranteed to receive it. Outside of a natural disaster, a serious injury, or a death that prevents you from meeting your obligation, then you will be expected to have your 1099-NEC submitted by the deadline.
Do I Need To File A 1099-NEC?
The threshold for reporting remains $600. This extends beyond independent contractors. If you, on behalf of your business, paid someone more than $600 for services, goods, or even legal fees, then you will need to file a 1099-NEC.
There are financial penalties for reporting incorrect information on your Form 1099-NEC. Fines are assessed per error. Make the decision now to document your payments. Create a pay stub for each payment, send one to your independent contractor, and keep the other for your records. If you are being told you made an error in your reports, you will have the documentation to back up your numbers.
Take a few minutes, make an accurate pay stub, and put tax season behind you.