Form 1099-NEC (Nonemployee Compensation) for 2010: A Complete Guide

Important Clarification About 2010

Form 1099-NEC did not exist in 2010. The form was originally discontinued in 1982 and wasn't reintroduced until tax year 2020. During 2010, nonemployee compensation was reported in Box 7 of Form 1099-MISC (Miscellaneous Income). This guide covers how nonemployee compensation was reported in 2010 using the 1099-MISC form, as there was no separate 1099-NEC form available that year.

What the Form Is For

Form 1099-MISC Box 7 was used in 2010 to report payments of $600 or more made to independent contractors, freelancers, and other nonemployees for services performed in the course of your trade or business. This reporting requirement applied to businesses, nonprofit organizations, government agencies, and anyone operating for gain or profit.

Who needs to file: If you paid someone $600 or more during 2010 for services (and they weren't your employee), you generally needed to report it. This included payments to sole proprietors, partnerships, limited liability companies (LLCs), and in specific cases, even corporations.

What qualifies as nonemployee compensation: The payments must meet four conditions: (1) paid to someone who isn't your employee, (2) paid for services in the course of your business, (3) paid to an individual, partnership, estate, or certain corporations, and (4) totaling at least $600 during the year. Common examples include fees to independent contractors, professional service fees (attorneys, accountants, consultants), commissions to nonemployee salespersons, directors' fees, and payments for services where parts or materials were incidental to the service.

Important exceptions: You didn't need to file for payments made to most corporations (except for legal services, medical services, and fish purchases), payments for merchandise only, wages to employees (reported on W-2), payments to tax-exempt organizations, or personal payments not related to your business.

When You’d Use It (Late and Amended Filings)

Standard filing deadline: For 2010 payments, you needed to furnish Copy B to recipients by January 31, 2011, and file Copy A with the IRS by February 28, 2011 (paper filing) or March 31, 2011 (electronic filing). The extended February 15 deadline applied only if you were reporting substitute payments (box 8) or gross proceeds to attorneys (box 14).

Late filing: If you missed the deadline, you should file as soon as possible to minimize penalties. The IRS assesses tiered penalties based on how late you file: the penalty increases the longer you wait. Filing within 30 days of the deadline results in a lower penalty than filing months late or not filing at all.

Amended returns: To correct an error on a previously filed 1099-MISC, you would file a corrected form by checking the "CORRECTED" box at the top. This was necessary when you discovered errors in the recipient's name, taxpayer identification number (TIN), amounts reported, or other information. You needed to file both the corrected form with the IRS and furnish a corrected statement to the recipient. Common reasons for amendments included reporting the wrong amount, using an incorrect TIN, or reporting income in the wrong box.

The penalty structure in 2010 provided some relief for quick corrections—amended returns filed promptly faced lower penalties than those filed well after the original deadline. If you never filed the original form and were filing late for the first time, this counted as a late filing rather than a correction.

Key Rules for 2010

The $600 threshold: This was the magic number. If total payments to a nonemployee reached $600 or more during 2010, reporting was required. This applied per recipient, not per transaction—you added up all payments to each person throughout the year.

Trade or business requirement: You only reported payments made in the course of your trade or business. Personal payments, even large ones, were never reportable. Nonprofit organizations, farmers' cooperatives exempt under certain sections, and government agencies all counted as engaged in a trade or business for reporting purposes.

Corporate exception and its limits: Generally, payments to corporations didn't require reporting, which simplified record-keeping. However, three major exceptions existed: (1) medical and health care payments to corporations, (2) attorneys' fees and gross proceeds to legal service providers (even if incorporated), and (3) fish purchases for cash from corporations. Federal executive agencies also had to report service payments to all vendors, including corporations.

Backup withholding rules: If a contractor failed to provide their TIN or the IRS notified you of an incorrect TIN, you were required to withhold federal income tax at 28% from reportable payments. This backup withholding was reported in Box 4 of Form 1099-MISC. Once you started withholding, you had to report the payment on Form 1099-MISC regardless of whether it reached the $600 threshold.

Self-employment tax implications: Amounts reported in Box 7 were generally subject to self-employment tax for the recipient. The 1099-MISC served as both an information return to the IRS and notice to the recipient that they needed to report this income and pay appropriate self-employment taxes on Schedule SE.

Record retention: You needed to keep records supporting your 1099-MISC filings for at least three years from the due date of the form. This included documentation of payment dates, amounts, and recipient information.

Step-by-Step (High Level)

Step 1: Collect contractor information upfront.

At the beginning of your business relationship, have each contractor complete Form W-9 (Request for Taxpayer Identification Number and Certification). This provides their legal name, business name (if applicable), TIN (Social Security Number or Employer Identification Number), and address. Getting this information before making payments prevents scrambling at year-end and reduces the risk of backup withholding.

Step 2: Track payments throughout the year.

Maintain detailed records of all payments to nonemployees, including dates and amounts. Your accounting system should flag when any contractor approaches or exceeds the $600 threshold. Many businesses found it helpful to track by contractor rather than by individual transaction.

Step 3: Determine who needs a form.

In late December or early January, review all your nonemployee payments for calendar year 2010. Identify everyone who received $600 or more and verify whether they fall under any exceptions (like payments to corporations for non-legal services). Double-check that you have valid W-9 information for everyone on your list.

Step 4: Obtain official forms.

You couldn't use forms printed from IRS.gov for Copy A because the IRS scanned these forms using special equipment. You needed to order official IRS forms by calling 1-800-TAX-FORM (1-800-829-3676) or order them online. Many businesses also used tax software that could produce the proper red-ink scannable forms. Copy B for recipients could be printed from IRS.gov or generated by software.

Step 5: Complete the forms accurately.

For each contractor requiring a form, complete all copies with the same information: your business information (payer), recipient information, and the payment amount in Box 7 (Nonemployee compensation). If you withheld backup withholding, enter that in Box 4. Check the "CORRECTED" box only if you were correcting a previously filed form.

Step 6: Prepare Form 1096.

This transmittal form accompanied your paper 1099-MISC forms sent to the IRS. It summarized the number of forms you were filing and the total amounts reported. One Form 1096 covered all your 1099-MISC forms filed together (but separate 1096 forms were needed for different types of 1099s).

Step 7: Distribute copies by deadline.

Mail or hand-deliver Copy B to each recipient by January 31, 2011. File Copy A with the IRS (accompanied by Form 1096 if filing by paper) by February 28, 2011 (paper) or March 31, 2011 (electronic). Keep Copy C for your records. If filing electronically, you needed software that met IRS specifications outlined in Publication 1220.

Common Mistakes and How to Avoid Them

Mistake #1: Not filing because the contractor is incorporated.

While most corporate payments were exempt, legal services and medical services to corporations required reporting. Many businesses incorrectly assumed all corporate payments were exempt and failed to report attorney fees paid to law firms. Solution: Always report legal fees in Box 7 and gross legal proceeds in Box 14, regardless of whether the attorney is incorporated.

Mistake #2: Missing the W-9 before making payments.

Businesses often discovered they lacked proper TIN information only when preparing year-end forms, forcing them to track down contractors after the relationship ended. Solution: Make W-9 collection part of your vendor onboarding process—no payments until you have the completed form on file. This also protects you from penalties for filing with incorrect or missing TINs.

Mistake #3: Reporting employee payments on 1099-MISC.

Misclassifying employees as independent contractors led to incorrect 1099-MISC filing when those payments should have been on Form W-2. Solution: Understand the difference between employees and independent contractors. The IRS applied common law rules focusing on behavioral control, financial control, and the relationship type. When in doubt, consult IRS Publication 15-A or seek professional guidance.

Mistake #4: Using recipient copies for IRS filing.

Copy A was printed with special red ink for IRS scanners—using downloads or photocopies from IRS.gov caused processing problems. Solution: Order official forms from the IRS or use approved tax software to generate compliant Copy A forms.

Mistake #5: Mixing up Box 7 and Box 3.

Some payments went in Box 3 (Other income) rather than Box 7, particularly termination payments to insurance salespeople meeting specific criteria, or payments that weren't subject to self-employment tax. Solution: Review the detailed box instructions to determine proper placement. Box 7 was for services that generated self-employment income; Box 3 was for other types of payments.

Mistake #6: Combining business and personal payments.

If you personally hired a contractor for non-business services (like home repairs), that payment wasn't reportable even if it exceeded $600. Only payments made in the course of your trade or business required reporting. Solution: Keep personal and business payments in separate accounts and clearly document the business purpose of each payment.

Mistake #7: Ignoring the special attorney reporting rules.

Attorneys had dual reporting requirements: their fees went in Box 7, while gross proceeds paid to them in settlement cases went in Box 14. Many payers confused these requirements. Solution: When making settlement payments involving attorneys, report gross proceeds in Box 14. Report attorney fees for legal services rendered in Box 7.

What Happens After You File

For the IRS

The IRS used your Form 1099-MISC to match against income reported by recipients on their tax returns. This matching program helped identify unreported income. If a contractor failed to report income you documented on Form 1099-MISC, the IRS might send them a notice proposing additional tax, penalties, and interest. Your filing also created a compliance record demonstrating you met your reporting obligations.

For recipients

Contractors who received your Form 1099-MISC used it to prepare their tax returns. They typically reported the Box 7 amount on Schedule C (Profit or Loss from Business), Schedule C-EZ, or Schedule F (farm income), depending on their business type. The reported amount flowed to Schedule SE for self-employment tax calculation. Recipients needed to keep these forms with their tax records for at least three years.

For your business records

Retain Copy C of all filed forms along with your supporting documentation for at least three years from the due date. These records proved valuable if the IRS questioned your expense deductions, if a contractor disputed the amount, or if you needed to verify payments for other business purposes. Many businesses kept these records longer, particularly when contractors later disputed amounts or classifications.

Penalties for non-compliance

If you failed to file, filed late, or filed with incorrect information, the IRS could assess penalties under Internal Revenue Code sections 6721 (failure to file) and 6722 (failure to furnish correct statements to payees). Penalty amounts in 2010 depended on how late you filed and whether you corrected errors. Intentional disregard of filing requirements carried much steeper penalties. The IRS could also assess penalties for failing to withhold backup withholding when required.

Penalty relief

The IRS could abate penalties if you showed reasonable cause for the failure and demonstrated it wasn't due to willful neglect. Valid reasons included circumstances beyond your control, like a fire that destroyed records, or reasonable cause, like relying on incorrect but reasonable advice. Simply being busy or unaware of the requirement generally didn't qualify as reasonable cause.

FAQs

Q1: What if I paid someone $650 total but in two separate payments of $325 each?

You must file Form 1099-MISC. The $600 threshold applies to the total of all payments made to that person during the entire calendar year, not individual transactions. Add up everything you paid them in 2010—if it reached $600 or more, reporting was required regardless of how many separate checks you wrote.

Q2: I forgot to get a W-9 from a contractor, and they're not responding now. What should I do?

File the 1099-MISC anyway using whatever information you have. Use the contractor's legal name and address from your records or their invoices. For the TIN, request it one more time in writing. If they still don't respond, you must begin backup withholding (28%) on any future payments. Filing the form showing the amount paid but leaving the TIN field blank may subject you to penalties, but not filing at all results in bigger penalties. You should have started backup withholding once they failed to provide a TIN.

Q3: Can I file Form 1099-MISC electronically, or must I use paper?

Electronic filing was available and even required if you filed 250 or more information returns of any type during the calendar year. For electronic filing, you needed approved software meeting IRS Publication 1220 specifications, which generated files in the required format. Electronic filing extended your deadline to March 31, 2011, versus February 28, 2011 for paper. Many businesses below the 250-return threshold voluntarily filed electronically for the extra month and faster processing.

Q4: The contractor says they only received $500, but my records show $650. What should I report?

Report what you actually paid according to your business records: $650. Double-check your records first—review invoices, payment records, and bank statements. If your records confirm $650, that's the reportable amount. The contractor might have different accounting (like netting out their expenses) or might have made an error. Provide them with a detailed breakdown of the payments. Your 1099-MISC reflects gross payments made, not net amounts after expenses or what they think they received.

Q5: I paid $800 to an LLC. Do I need to file a 1099-MISC?

It depends on how the LLC is taxed. If the LLC is taxed as a sole proprietorship or partnership (which is common for single-member or multi-member LLCs), yes, you must file. If the LLC elected to be taxed as a corporation (either C-corp or S-corp), then generally no, unless the payment was for legal services, medical services, or fish purchases. This is why Form W-9 asks LLCs to indicate their tax classification—it determines your filing requirement. When in doubt, file the form; over-reporting causes fewer problems than under-reporting.

Q6: What's the difference between Box 3 and Box 7 for nonemployee payments?

Box 7 (Nonemployee compensation) was for payments for services that generated self-employment income—the recipient would owe self-employment tax. Box 3 (Other income) covered various payments that were taxable but not subject to self-employment tax, such as prizes not for services, certain termination payments to former insurance salespeople, or Indian gaming payments to tribal members. Most contractor service payments belonged in Box 7. The box placement mattered because it affected how recipients calculated their taxes.

Q7: A contractor worked for me in December 2010, but I didn't pay them until January 2011. Which year do I report it?

Report payments based on when you actually paid them, not when services were performed or when you became obligated to pay. Since you paid in January 2011, this payment counts toward the 2011 tax year and would be reported on a 2011 Form 1099-MISC (filed in early 2012), not on the 2010 form. This is the cash basis reporting method that applies to Form 1099-MISC. Keep good records to track which year each payment occurred, especially for work spanning year-end.

Additional Resources

Need More Help?
For questions about reporting on Form 1099-MISC for 2010, contact the IRS Information Reporting Customer Service toll-free at 1-866-455-7438 or 304-263-8700 (not toll free), Monday through Friday 8:30 a.m. to 4:30 p.m. Eastern time.

Additional IRS Resources:

• 2010 Form 1099-MISC (available at IRS.gov)
• 2010 Instructions for Form 1099-MISC (available at IRS.gov)
• 2010 General Instructions for Information Returns (available at IRS.gov)

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