Letter from the IRS about Form 1099-NEC & Form 1096
What is form 1099-NEC (Nonemployee Compensation)? Beginning in the 2020 tax year, Form 1099-NEC is the Internal Revenue Service (IRS) form used by businesses to report payments made to independent contractors, freelancers, sole proprietors, and self-employed individuals. The 2020 form is a redesign of a 1982 form of the same name.1 In more recent years, prior to 2020, nonemployee compensation was reported in box 7 on Form 1099-MISC.
Businesses should complete a Form 1099-NEC for any nonemployee person to whom the business paid $600 or more during the year. This includes fees, commissions, prizes, or awards for services completed by independent contractors, cash payments for fish purchased from anyone engaged in the business of catching fish, or payments made to an attorney. The form must also be completed for any person from whom federal income tax has been withheld under backup withholding rules, regardless of the amount of payment.
What is form 1096 used for
IRS Form 1096 (officially the "Annual Summary and Transmittal of U.S. Information Returns") is an Internal Revenue Service (IRS) tax form used in the United States used to summarize information returns being sent to the IRS. Information returns are sent by the issuer to recipients as well as the IRS, but Form 1096 is not sent to the recipients; rather it is only sent to the IRS.
Form 1096 is only used if one is physically filing the accompanying forms with the IRS. If one files the accompanying forms electronically, then Form 1096 is not required. When more than 250 information returns (e.g. Forms 1042-S, 1098, 1099) of a single type are filed for the calendar year, one is required to file all forms of that type electronically with the IRS, in which case Form 1096 is not used for that type.
Form 1096 has two separate due dates to the IRS depending on the type of form accompanying 1096. Form 1096 is due by the end of February each year when used for Forms 1097, 1098, 1099, 3921, 3922 or W-2G, and is due by the end of May when used for Forms 5498.
Why you received this letter
This time of the year, you may receive an unexpected letter from the IRS advising you may be required to file forms 1099-NEC and 1096. You received this letter because your prior tax return likely included self-employment income showing deduction for contractor labor as a business expense.
If you hired US contractors then you were required to file the form 1099-MISC to report payments made to independent contractors (non-employees). Starting from the 2020 tax year, those payments will be reported on a new form: Form 1099-NEC.
Proper documentation for your staff
If you run a business outside of the United States and hire only non-US persons then the form 1099-NEC for international contractors is not needed. As a matter of precaution, ask people working for you (employees of independent contractors) to complete form W8-BEN to confirm they are not US citizens or green cardholders. In this case, no 1099 form for non-us citizens is required. For those who are US persons, you will be required to file form 1099-NEC and submit it to the IRS. Form 1096 is the summary attached to multiple forms 1099-MISC if filed on paper forms and mailed.
If you do not hire US contractors, you can disregard this letter
If your business does hire US contractors then disregard this letter. No need to respond to the IRS to tell them the letter does not apply to you.