If you receive income from a source other than earned wages or salaries, you may receive a Form 1099-NEC, Nonemployee Compensation (1099-MISC in prior years). Generally, the income on this form is subject to federal income tax and state income tax. 

The IRS requires those that pay nonemployee compensation income in the course of their trade or business to issue Form 1099-NEC to their payees and requires the payees to include these payments on their tax returns.

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Form 1099-NEC

Several types of income can be reported on Form 1099-NEC, including nonemployee compensation, cash payment for fish, or payments to an attorney. One of the most common reasons for receiving a 1099-NEC is performing work as an independent contractor.

If you have the payer withhold federal income tax from your payments, the payer will report the withholding in Box 4. State income tax withholding is reported in Box 5.

Penalties for not issuing Form 1099-NEC

People and companies that make payments of nonemployee compensation income to individuals must give the payee Form 1099-NEC by the end (in most cases) of January of the year following the tax year in which the income was paid.

For example, if you received income in 2020 that is non-employee compensation, the paying institution or individual must issue Form 1099-NEC by Jan. 31, 2021.

  • If the institution fails to do so, the penalty against the company varies from $30 to $100 per form ($500,000 maximum per year), depending on how long past the deadline the company issues the form.
  • If a company intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum.

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Penalties for not reporting Form 1099-NEC

If you receive a Form 1099-NEC that reports your nonemployee compensation income and you don’t include the income on your tax return, you may also be subject to a penalty. Failing to report income may cause your return to understate your tax liability.

  • If this occurs, the IRS may impose an accuracy-related penalty that is equal to 20 percent of your underpayment.
  • As an example, if the failure to include your nonemployee compensation income caused you to understate your tax liability by $500, your penalty would be $100 ($500 x .20 = $100).

How to report Form 1099-NEC on your return

To avoid an underpayment penalty, be sure to include your nonemployee compensation income on your Form 1040. If your income is nonemployee compensation, you’ll need to complete, in most cases, Schedule C, Profit or Loss From Business, and then transfer the net earnings to Form 1040. For rents or royalties, complete Schedule E, Supplemental Income or Loss, and then transfer the applicable amount to Form 1040.

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