What is Form 1099-NEC? It’s simple; it’s the 1099 given to those that receive non-employee compensation, also known as independent contractor income. Non-employee compensation used to be represented in box 7 of Form 1099-MISC. It’s interesting to note that Form 1099-NEC is actually not new, but hasn’t been used since 1982, being first introduced as far back as 1979.
Form 1099-NEC was most likely reintroduced as a result of a sharp rise in the amount of independent contractors in the workforce. Therefore, it makes sense to give these workers their own tax form because lumping such a large portion of the economy into a form labeled miscellaneous doesn’t seem to impart the level of specificity that such a group logically necessitates. In other words, contractors are now ubiquitous, and they should be a specifically recognized source of consistent annual income and not lumped in with excess golden parachute payments (box 13, Form 1099-MISC).
Akin to the forgoing changes, congress passed the PATH Act of 2015, which stands for Protecting Americans from Tax Hikes, and in relevant part, moved up the deadline for filing all Forms 1099, including Form 1099-NEC from February 28 to January 31, while also getting rid of the automatic 30-day extension for 1099s that include non-employee compensation. What does this mean? It means you have to file all Forms 1099 including NEC, by January 31 of every year for the previous tax year, and as a result the first deadline for filing the reintroduced Form 1099-NEC will be January 31, 2021.
In terms of the requirement for reporting income on Form 1099-NEC, you have to give someone a Form 1099-NEC when you have paid them more than $600 in contract income. So this requirement has been left unchanged from contractors’ Form 1099-MISC days. However, these payments need to be reported only if made in the context of a trade or business. For example, if you pay a guy to clean the gutters of your personal residence and you have more than $600 in gutter cleaning, you don’t need to give the guy a Form 1099-NEC because you didn’t pay him in the course of your trade or business.
Since the reintroduction of Form 1099-NEC there have been some requisite changes in the 2020 Form 1099-MISC. Boxes 1-6 are the same as they were in 2019 and other recent prior years. However, box 7 has been changed from non-employee compensation to “payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale.” This used to be box 9 and refers to a person that has made more than $5,000 from the sale of consumer goods outside the confines of a retail establishment. Box 9 is now crop insurance proceeds, which is simply too boring to go into, but I think that you can probably gather it’s proceeds received from an insurance payout due to a covered disaster that destroyed someone’s crops; this used to be in box 10. The new box 10 is now gross proceeds paid to an attorney, which intimates that an amount was paid to an attorney that encompassed both fees and expenses, so some undifferentiated dollar amount is allocated to reimbursed expenses. Box 12, which used to be reserved for future use, is now Section 409A deferrals. These are deferrals in compensation for mainly higher levels employees. Such deferrals were seen as being abused, so special laws were crafted, which caused such deferrals to be reported in an earlier year. Box 14, which used to be gross proceeds paid to an attorney, is now nonqualified deferred compensation, which is related to the same issue as box 12, and outside scope and super boring.
I hope you had fun reading about the new Form 1099-NEC and the resulting changes to Form 1099-MISC. A lot of people you know will probably get at least one of them. If you have any issue with either Form 1099-NEC or Form 1099-MISC, drop me a line at (713) 397-4678 or email me at firstname.lastname@example.org. Don’t worry, the first phone consultation is always free, so ask any questions you need to. Finally, if you like us, how about liking us on FB? It’s always greatly appreciated, bro.