Before 2020, taxpayers reported compensation for independent contractors on Form 1099-MISC (Box 7), but for tax years  2021 and beyond, companies must separately report such compensation on Form 1099-NEC. 


Form 1099-NEC Nonemployee Compensation

Taxpayers will file Form 1099-NEC on income paid for services, fees, benefits, commissions, and prizes and awards performed by independent contractors. This income is referred to as nonemployee compensation, which does not have payroll taxes withheld. On the contrary, employee compensation does withhold payroll taxes, and such compensation and withholding is reported on Form W-2.  Report on Form 1099-NEC when nonemployee compensation is paid in the course of a trade or business, but personal payments are not. Nonprofit organizations are considered engaged in a trade or business, and as such is also subject to the Form 1099-NEC reporting requirements. For businesses in California, refer to CA AB 5 for the regulations that apply to determine the classification. 

Who receives a Form 1099-NEC: Individuals, partnerships, estates, government agencies, non profit organizations, and in some cases, corporations (for attorney fees or payments by a federal executive agency for services).

Filing Requirement: $600 or more paid to an independent contractor in a calendar year.

IRS Filing due date: January 31

Due date to send to recipient: January 31

Extension: 30 day extension by submitting paper Form 8809 or automatic by creating and transmitting an electronic file on the FIRE webpage.

Before preparing, collect the name, address, and identification number of the contractor, or request their Form W-9 as well as any federal or state income tax withheld. You will enter the compensation amount on Form 1099-NEC Box 1 and withholdings in Box 4 and 5 for federal and state, respectively.

You may file your 1099-NEC through any low cost online providers that will electronically transmit to the IRS, or they can file directly with the IRS here.

1040 Reporting: Schedule C Profit or Loss from Business. This will be subject to self-employment taxes, since payroll taxes were not withheld.


Form 1099-MISC (Miscellaneous Information)

Payments unrelated to nonemployee compensation by a trade or business are reported on Form 1099-MISC. This income includes, but not limited to, the following:

  • Royalties (Box 2)
  • Rent or royalty payments (Box 1)
  • Prizes and awards (Box 3)
  • Other Income (Box 3)
  • Payments to physicians, physicians’ corporation and other suppliers of health and medical services (Box 6)
  • Gross proceeds paid to attorneys (Box 10)

Who receives a Form 1099-MISC: Individuals, partnerships, estates, government agencies, non profit organizations, and in some cases, corporations.

Filing Requirement: $600 or more paid in a calendar year (Exception: $10 or more for royalties).

IRS Filing Due date: February 28 (March 31 if filed electronically)

Due date to send to recipient: January 31 (February 15 for attorneys)

Before preparing, collect the name, address, and identification number of the recipient, or request their Form W-9. You will enter the compensation amount on Form 1099-MISC based on the boxes indicated above.

You may file your 1099-MISC through any low cost online providers that will electronically transmit to the IRS, or they can file directly with the IRS here.

1040 Reporting: Form 1040 Line 21 Other income not subject to self-employment tax, but it is from your trade or business, report it with your business income on Schedule C.


Penalties

It is important to correctly and timely file by the above due dates or the following penalties are incurred:

  • $60 per return filed 30 days after the due date
  • $120 per return if filed more than 30 days by due date but by August 1
  • $310 per return if you file after August 1

It is important to note that if you did not file a required Form 1099, an auditor may disallow your expense even if you provide the supporting documentation. As such, it is imperative to properly and timely file Form 1099’s.

Further detailed instructions are also explained in IRS Publication 1220 and IRS Instructions for Forms 1099-MISC and 1099-NEC.

Should you have any questions regarding 1099 filings and reporting, please contact our team to discuss your specific situation.

 

 

Aura Advisors, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.