Form 1099-NEC: Your Complete Guide to Nonemployee Compensation Reporting (2020)

What Form 1099-NEC Is For

Form 1099-NEC (Nonemployee Compensation) is an information return that businesses must file to report payments made to independent contractors and other non-employees. Think of it as the independent contractor's equivalent of the W-2 form that employees receive.

You must file Form 1099-NEC when you've paid $600 or more during the tax year to someone who is not your employee for services performed in the course of your trade or business. This includes payments to freelancers, consultants, independent contractors, and even attorneys for their services. The form helps the IRS track income that recipients need to report on their tax returns. IRS.gov

Importantly, Form 1099-NEC is only for trade or business payments—personal payments don't need to be reported. Nonprofit organizations, government agencies, trusts, and even some tax-exempt organizations must file these forms if they make qualifying payments. IRS.gov

The 2020 reintroduction of Form 1099-NEC separated nonemployee compensation from Form 1099-MISC, where it had been reported in previous years. This change was driven by the PATH Act, which accelerated filing deadlines for nonemployee compensation reporting.

When You’d Use Form 1099-NEC (Including Late and Amended Filings)

Regular Filing Deadlines

For the 2020 tax year, the filing deadline for Form 1099-NEC is February 1, 2021 (since January 31, 2021, fell on a Sunday). This deadline applies whether you file on paper or electronically—a significant departure from most other information returns that allow extra time for e-filing. You must also furnish copies to recipients by January 31, 2021. IRS.gov

This accelerated deadline exists because nonemployee compensation reporting is crucial for preventing refund fraud and ensuring accurate tax filing.

Late Filings

If you miss the deadline, file as soon as possible to minimize penalties. The penalty structure is tiered based on how late you file: up to 30 days late carries a $50 penalty per form, 31 days to August 1 costs $110 per form, and after August 1 or not filing at all results in a $270 penalty per form for 2020 returns. Small businesses face maximum penalties ranging from $197,500 to $565,000 depending on timing, while larger businesses face higher caps. IRS.gov

Amended Returns

Discovered an error after filing? You'll need to file a corrected Form 1099-NEC. For paper corrections, consult the General Instructions for Certain Information Returns, Part H. For electronic corrections, refer to Publication 1220. Critical rule: Never check the VOID box on a correction form—this tells IRS scanning equipment to ignore the form entirely, meaning your correction won't be processed. IRS.gov

Key Rules and Requirements for 2020

Several important rules govern Form 1099-NEC filing:

• The $600 Threshold: You must report payments of $600 or more made to any single non-employee during the tax year. However, you must also file if you withheld any federal income tax under backup withholding rules, regardless of the payment amount. IRS.gov
• Corporate Exception (With Important Caveats): Generally, you don't need to report payments to corporations. However, this exception does not apply to payments for legal services—you must report attorney fees to corporations that provide legal services. Medical and health care payments to corporations must also be reported. IRS.gov
• Backup Withholding Requirements: If a contractor fails to provide a valid Taxpayer Identification Number (TIN), you must withhold federal income tax at the backup withholding rate and report it in Box 4 of Form 1099-NEC. The contractor may also face penalties under Section 6723 for failing to provide their TIN. IRS.gov
• Proper Classification Matters: The distinction between employees and independent contractors is crucial. Misclassifying workers can lead to serious tax consequences. Form 1099-NEC is only for non-employees; employee wages must be reported on Form W-2. IRS.gov
• Box 1 Reporting: All nonemployee compensation goes in Box 1. This includes services performed, parts and materials provided by contractors, and cash payments for fish or aquatic life purchased from those in the fishing business.

Step-by-Step (High Level)

Step 1: Identify Who Needs a Form

Review your records to identify all non-employees who received $600 or more during 2020 for services, or anyone from whom you withheld backup taxes.

Step 2: Collect TINs

Obtain a completed Form W-9 from each contractor before or when you first make payments. This provides their correct legal name and Taxpayer Identification Number. Missing or incorrect TINs can trigger penalties and backup withholding requirements.

Step 3: Prepare the Forms

Complete a Form 1099-NEC for each qualifying recipient. Enter your information as the payer, the recipient's details, and the total payments in Box 1. Use Box 4 if you withheld any backup withholding taxes.

Step 4: Distribute Copies

Furnish Copy B to each recipient by January 31. Most businesses mail them, though you can provide electronic copies if recipients consent.

Step 5: File with the IRS

Submit Copy A to the IRS by February 1. If filing on paper, use Form 1096 as a transmittal document. Electronic filing through the IRS Filing Information Returns Electronically (FIRE) system or Information Returns Intake System (IRIS) is recommended, especially since filing 10 or more returns requires e-filing.

Step 6: Keep Records

Retain Copy C for your records for at least four years in case of IRS inquiries or audits.

Common Mistakes and How to Avoid Them

• Mistake #1: Reporting Payments in the Wrong Box
  The IRS uses box information to match recipient returns. Always verify payments go in the correct box. Nonemployee compensation goes in Box 1 of Form 1099-NEC, not Form 1099-MISC. IRS.gov
• Mistake #2: Checking the VOID Box on Corrections
  When filing a corrected return, never check the VOID box. IRS scanners skip voided forms entirely, so your correction won't be processed. Follow proper correction procedures instead. IRS.gov
• Mistake #3: Truncating or Misformatting TINs
  While you can truncate recipient TINs on statements given to recipients, you cannot truncate them on forms filed with the IRS. Always use proper formatting: XXX-XX-XXXX for SSNs and XX-XXXXXXX for EINs. Never truncate your own payer TIN. IRS.gov
• Mistake #4: Forgetting the Corporate Exception Doesn't Apply to Attorneys
  Many businesses incorrectly assume they don't need to report payments to law firms because they're corporations. Wrong! You must report attorney fees regardless of corporate status. IRS.gov
• Mistake #5: Missing the Early Deadline
  Form 1099-NEC has a February 1 deadline, not the later February 28/March 31 deadlines that apply to most 1099-MISC reporting. This early deadline catches many filers off guard.
• Mistake #6: Failing to Obtain TINs Upfront
  Waiting until tax time to collect W-9 forms from contractors creates unnecessary headaches. Require completed W-9s before making the first payment to avoid backup withholding complications.

What Happens After You File

• IRS Matching: The IRS uses the information on your Form 1099-NEC to cross-check against the recipient's tax return. They verify that contractors report the income you paid them. This matching process helps identify unreported income and potential tax evasion. IRS.gov
• Recipient Reporting: Recipients use the information from Form 1099-NEC to complete their tax returns. Self-employed individuals typically report this income on Schedule C (Form 1040), while partnerships report on Form 1065.
• Potential Notices: If the IRS detects discrepancies between your filing and the recipient's return—or if you made filing errors—you may receive a notice. Common issues include mismatched TINs, missing forms, or incorrect amounts. IRS.gov
• Penalty Assessment: If you filed late or incorrectly, the IRS will mail you a notice (typically Notice 972CG) explaining the penalty. Interest accrues monthly on unpaid penalties. You have 45 days (60 days for foreign filers) to respond if you have reasonable cause for the error. IRS.gov
• Record Retention: Keep copies of all filed forms and supporting documentation for at least four years in case the IRS audits your business or questions your reporting.

FAQs

Q1: Do I need to file Form 1099-NEC for payments made to an LLC?

It depends on how the LLC is taxed. If the LLC is taxed as a sole proprietorship or partnership, yes—file Form 1099-NEC. If the LLC is taxed as a corporation (C-corp or S-corp), generally no, unless the payments are for legal services or medical/health care. When in doubt, ask the LLC to complete Form W-9, which indicates their tax classification.

Q2: What's the difference between Form 1099-NEC and Form 1099-MISC?

Starting in 2020, nonemployee compensation moved from Box 7 of Form 1099-MISC to Box 1 of the new Form 1099-NEC. Form 1099-MISC is still used for other types of payments like rents, royalties, and prizes. The split occurred because nonemployee compensation has an earlier filing deadline (February 1 vs. February 28/March 31). IRS.gov

Q3: Can I request an extension to file Form 1099-NEC?

You can request an automatic 30-day extension by filing Form 8809 (Application for Extension of Time to File Information Returns) by the original due date. However, be aware that the IRS rarely grants extensions beyond the initial 30 days for Form 1099-NEC due to its role in preventing refund fraud.

Q4: What if my contractor refuses to provide a W-9 or TIN?

If a contractor won't provide their TIN, you must begin backup withholding at the current rate (24% for most years) on their payments. Report the withheld amount in Box 4 of Form 1099-NEC. You must still file the form even without a TIN, though you'll face potential penalties that may be reduced if you can show reasonable cause for the missing information.

Q5: Do I need to report reimbursements for expenses?

Generally, reimbursements paid under an accountable plan (where the contractor provides receipts and returns excess amounts) are not reportable. However, reimbursements paid under a nonaccountable plan should be included in the total nonemployee compensation reported in Box 1.

Q6: How do penalties for late filing work?

For 2020 returns, penalties are tiered: $50 per form if you file correctly within 30 days late, $110 per form if filed 31 days late through August 1, and $270 per form if filed after August 1 or not at all. Intentional disregard carries a $550 penalty per form with no maximum. Small businesses face annual maximum penalties between $197,500 and $565,000 depending on timing. IRS.gov

Q7: Can I e-file Form 1099-NEC for free?

Yes! The IRS offers the Information Returns Intake System (IRIS), a free web-based platform for filing Form 1099 series returns electronically. This option is especially valuable for businesses filing fewer than 250 forms annually. For businesses filing 10 or more information returns, e-filing is mandatory starting with the 2024 calendar year.

Additional Resources

• Form 1099-NEC and instructions: IRS.gov/Form1099NEC
• General Instructions for Certain Information Returns: IRS.gov/1099GeneralInstructions
• Filing Information Returns Electronically (FIRE): IRS.gov/FIRE

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