The Basics of Form 1099-NEC

It’s that time again! The 1099 filing season is here. Here are some key considerations when it comes to filing 1099s.

Which 1099 form do you need?

Form 1099-NEC reports any non-employee compensation payments over $600. In the past, this type of compensation was reported in box 7 of Form 1099-MISC. The most common payments reported on Form 1099-NEC box 1 will be payments for services performed by someone who is not your employee (typically referred to as an independent contractor) and payments to an attorney. All other traditional Form 1099-MISC payments, such as rent, other income, or royalties, will be reported on Form 1099-MISC.

How should payments to attorneys be reported?

Attorney payments of $600 or more will be reported on either Form 1099-MISC or Form 1099-NEC according to the following rules:

• Attorney fees paid in the course of your trade or business for services an attorney renders to you are reported in box 1 of Form 1099-NEC.
• Gross proceeds paid to an attorney in connection with legal services (but not for the attorney’s services) are reported in box 10 of Form 1099-MISC.

The IRS outlines the following example: An insurance company pays a claimant’s attorney $100,000 to settle a claim. The insurance company reports the payment as gross proceeds of $100,000 in box 10 of Form 1099-MISC. The insurance company does not have a separate Form 1099-NEC reporting requirement for the claimant’s attorney’s fees paid from these funds.

When are Form 1099-NEC and Form 1099-MISC due?

Form 1099-NEC and Form 1099-MISC are due to the IRS on different dates. Form 1099-NEC is due by January 31, 2023, while Form 1099-MISC is due by February 28, 2023. However, you must send both forms to recipients by January 31, 2023.

Potential complications

State reporting

The IRS has included Form 1099-NEC in the IRS 1099 Combined Federal/State Filing Program (CF/SF). Under this program, the IRS sends Form 1099 information to participating states, meaning companies do not have to file separately with those states. If a state does not participate in the combined filing program and requires 1099 filings, you must submit a separate state filing in the format required by that jurisdiction. It is essential to understand the reporting requirements for the state(s) where the form issuer does business, where the payee resides, and where the services were performed. Filers also need to understand the state’s filing deadlines and e-file requirements.

Composite statement rules

Many companies have payees that receive nonemployee compensation and some other type of income. In the past, one Form 1099-MISC could include all those amounts. Per IRS Publication 1179, Form 1099-MISC and 1099-NEC payments cannot be combined into one statement. The recipient will need to receive a Form 1099-NEC for nonemployee compensation and a Form 1099-MISC for other types of income.

Filing the wrong form

It is important to file the correct form because filing the wrong form could result in a penalty for not issuing the correct form to the recipient and a separate penalty for each form filed past the due date once the proper form is filed.