Jan 12

Jan 12 1099 NEC Filing - Due on Feb. 1, 2021

Another year on the books! Now 2020 is over, let’s get a head start and learn about how to file 1099s for contractors. If you have been working with independent contractors, you probably have heard the changes made on filing 1099s.

The new rule made by the IRS on 1099 filing: for all 2020 filings, as a business owner, you will need to use form 1099-NEC to report non-employee compensation (ie, contractors). Previously, the non-employee compensation was reported on form 1099-MISC.

With that in mind, here is a summary of everything you need to know on filing 1099s:

1. Form 1099-NEC V.S 1099-MISC

What is Form 1099-NEC?

The 1099-NEC is the exclusive form business owners will use to report payments to independent contractors starting 2020.

Form 1099-NEC will replace box 7 on Form 1099-MISC, which is where clients used to report non-employee compensation. In other words, if you paid more than $600 within the calendar year to a non-employee, you must use Form 1099-NEC to report the payments.

Do you still need 1099-MISC?

Form 1099-MISC is used to report miscellaneous income. It went through a redesign in 2020 to remove non-employee compensation from its scope, but it still exists.

The most significant change to Form 1099-MISC is in box 7, which was previously used to report independent contractor payments. In the redesigned version, however, box 7 serves for reporting direct sales of consumer products worth $5,000 or more aimed for resale.

2. When is the deadline?

For 1099-NEC, it is due on Feb 1st, 2021.

For 1099-MISC, it is due on Mar 1st, 2021, if you file on paper; or March 31, 2021, if you file electronically.

Be aware, if you file 1099s late, there is a penalty of $50 per 1099; the penalty amount increases when time goes on. So don’t be late!

3. Who needs to file a 1099 to:

You need to issue a 1099 to: any independent contractor or vendor who is a self-employed individual AND has paid over $600 in a calendar year (from January 1st – December 31st, 2020). *Note: C-corp and full-time employees DO NOT need to issue a 1099. 1099s only applies to freelancers, contractors, single member LLCs and S-corp.

Who needs to file Form 1099-NEC?

If your startup paid an independent contractor more than $600 during the year, you will be required to file the new Form 1099-NEC. Here are some examples:

Professional service fees to architects, designers and software engineers
Fees paid by one professional to another
Commissions to non-employee salespeople

Who needs to file Form 1099-MISC?

If you paid more than $600 during a calendar year to an individual or company for:

Rent payments
Prizes and awards
Medical and health care payments
Payments to an attorney
Section 409A deferrals
Nonqualified deferred compensation

4. Which software to use to track and issue 1099:

We recommend using QuickBooks Online (QBO). QBO tracks, issues, and files 1099 payments electronically, so you don’t have to manually mail out the forms. That means there will not be a postal office visit! If you already are using QBO, with the already recorded payment expenses in the software, you will be able to save time and get the filings done possibly within a couple hours. Less manual work and more time saving!

5. Forms to use for filing 1099s:

For US residents: Form W-9 (Request for Taxpayer Identification Number), which enables them to report independent contractor payments. The contractors report their income via a Schedule C form, which we've written more about here.
For non-US residents: Form W-8BEN or W-8BEN-E 9 (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting), which enables them to prove they reside outside of the United States.

Pro tips:

We recommend collecting all the W-9 forms early. Some companies even proactively get Form W-9 from contractors and vendors as part of their onboarding process.
It is important to have a good bookkeeping system and keep separate expenses for non-employee compensation, so you won’t be overwhelmed when it comes to tax filing times.

To download the 1099-NEC and 1099-MISC and see more instructions, click the link.

Takeaway:

Starting this year, you, as a business owner, will need to use 1099-NEC for non-employee compensation (contractors and vendors), and 1099-MISC for other expenses. Remember to send a copy to the IRS before the deadlines, a copy for the non-employees, and save a copy for yourself. If you are already using QuickBooks, you can track and file 1099s there to save time!