What Form 1099-NEC (2020) is for
Form 1099-NEC reports nonemployee compensation paid by a business during the calendar year to independent contractors, consultants, and service providers. The IRS requires this form to report payments totaling $600 or more for services performed in the course of a trade or business. It replaces the previous use of Form 1099-MISC for such income. Businesses, law firms, real estate agents, and nonprofit organizations must use this form when payments meet the threshold amount or when federal income tax was withheld under backup withholding rules.
When You’d Use Form 1099-NEC (2020)
You must file Form 1099-NEC when your business pays at least $600 to an independent contractor, attorney, or other provider during the tax year. This includes payments for fees, legal services, business travel allowances, and cash payments to individuals who catch fish or sell consumer products for resale. Personal payments do not require reporting. The due date for filing electronically or on paper forms is February 1, 2021, for the 2020 tax year.
Key Rules or Details for 2020
- $600 threshold amount: Businesses must report payments of $600 or more made to any independent contractor or service provider during the tax year to comply with Internal Revenue Service requirements.
- Backup withholding rules: If a contractor fails to provide a taxpayer identification number, the business must withhold federal income tax and report the withheld amount in Box 4 of Form 1099-NEC.
- Corporate exception: You generally do not report payments to corporations, except for attorney’s fees, health care payments, or legal services made to a law firm.
- Nonemployee compensation paid: Include all services performed and related materials, direct sales, and aquatic life purchases from those catching fish for resale in Box 1.
- Reporting nonemployee compensation: Always use this separate form instead of the 1099-MISC to report nonemployee compensation and avoid confusion with other reportable payments.
- Gross proceeds reporting: You must report gross proceeds to attorneys for settlements or awards paid, even if the law firm operates as a corporation.
- Federal income tax withheld: If backup withholding applied, list federal income tax withheld in Box 4 and ensure it matches IRS records.
- Other payments: Include military differential wage payments, deposit commission payments, and awards paid as required if they qualify as reportable payments.
- E-file requirement: The IRS encourages e-filing through FIRE or IRIS for faster processing, especially when filing 10 or more information returns.
- Taxable income reporting: Recipients use Form 1099-NEC amounts to calculate taxable income, self-employment tax, Medicare taxes, and Social Security obligations on their individual tax return.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Identify who needs a form
Review your records for the calendar year and identify each independent contractor, limited liability company, or service provider who received $600 or more for services performed or other commission-based income.
Step 2: Collect and verify TINs
Obtain Form W-9 from every payee before making any payments. Verify the taxpayer identification number to prevent mismatches that could trigger backup withholding or IRS penalty notices.
Step 3: Prepare the forms
Complete each Form 1099-NEC with accurate payer and recipient information. Include all fees paid, cash payments, or awards paid in Box 1, and record any federal income tax withheld in Box 4.
Step 4: Distribute recipient copies
Furnish Copy B to each recipient by January 31, 2021. Electronic copies may be sent with the contractor’s consent. Ensure each recipient receives the correct information for their individual tax return.
Step 5: File Form 1099-NEC electronically or on paper
Submit Copy A to the IRS by February 1, 2021. Businesses filing 10 or more information returns are required to e-file. Paper forms require Form 1096 as a transmittal sheet.
Step 6: Retain records
Keep all paper forms, W-9s, and electronic filing confirmations for a minimum of four years. Retention ensures proof of compliance in the event the IRS requests further information or conducts an audit.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Reporting income on the wrong form: Some filers mistakenly use Form 1099-MISC instead of Form 1099-NEC. To avoid this, always report nonemployee compensation paid on the correct form.
- Missing the February due date: Businesses often forget the early due date. Mark your calendar for January 31 (recipients) and February 1 (IRS) to ensure timely filing.
- Incorrectly truncating TINs: The IRS does not allow truncating payer identification numbers on filed forms. Use full TINs on IRS copies and only truncate on payee copies.
- Failing to report attorney’s fees: Payments to law firms for legal services remain reportable even if the firm is a corporation. Always verify whether an exception applies.
- Overlooking backup withholding: If a payee refuses to provide a TIN, start backup withholding immediately and report the federal income tax withheld correctly on Form 1099-NEC.
- Neglecting to e-file: Electronic filing reduces delays and errors. Use the FIRE or IRIS system for convenience and to confirm IRS acceptance more quickly.
- Omitting other taxable payments: Include business travel allowances, real estate agent commissions, or other commission-based payments to ensure full compliance with reportable payment rules.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
After you file Form 1099-NEC, the IRS matches the information to recipient tax returns. Contractors use this data to report income, self-employment taxes, and any Medicare or Social Security contributions due. If errors or mismatches occur, the IRS may issue a notice requiring correction or explanation. Businesses must retain all documents, including e-file confirmations, to prove compliance and address any questions about tax liability or reporting accuracy.
FAQs
Do I report payments for legal services on Form 1099-NEC (2020)?
Yes, attorney’s fees and other legal services are reportable payments, even when paid to a law firm or corporation. Include these under nonemployee compensation.
How do I handle federal income tax withheld on Form 1099-NEC?
Report any federal income tax withheld under backup withholding rules in Box 4. Ensure the withheld amount matches your records and IRS reporting requirements.
Can I file Form 1099-NEC electronically through e-file systems?
Yes, the IRS allows filing electronically using FIRE or IRIS platforms. E-file submissions improve accuracy, speed, and reduce rejected returns compared to paper forms.
What are direct sales, and are they reported on Form 1099-NEC?
Direct sales of consumer products exceeding $5,000 for resale are reported on Form 1099-MISC, not Form 1099-NEC. Use the correct form to avoid filing errors.
Do I report excess golden parachute payments on Form 1099-NEC?
No, excess golden parachute payments are reported separately under different IRS forms. Form 1099-NEC is for nonemployee compensation only.
Should I report gross proceeds to attorneys on Form 1099-NEC?
Yes, you must report gross proceeds related to settlements or awards paid to attorneys. Verify each entry to ensure compliance with IRS and legal reporting standards.
How do I file Form 1099-NEC if I missed the deadline?
File as soon as possible. Late filings may result in penalties based on how many business days you are overdue. Electronic filing helps reduce additional fees.
