Form 1099-NEC Box 3: Guide to Excess Golden Parachute Payments

You might know that Form 1099-NEC is mainly used to report nonemployee compensation to contractors for their services. But that’s not all this form is for.

Box 3 of Form 1099-NEC is for reporting excess golden parachute payments. Sounds complicated, isn’t it? You might not need this box in most scenarios, but it’s always good to know what it is and when to use it.

In this blog, we break it down for you so that you don’t end up misreporting anything. Let’s get the ball rolling.

What Is 1099-NEC Box 3?

Box 3 of Form 1099-NEC is specifically for reporting excess golden parachute payments. Not for anything else. But what are these payments exactly?

These are compensations that are made to executives when there is a change in company ownership or control such as an acquisition or merger. And the amount paid is defined under IRS Section 280 G.

Basically, these are not any routine payments and are quite specific in terms of what qualifies. Some examples include severance payments, transaction bonuses paid at closing, accelerated equity vesting, among others.

According to the IRS, “an excess parachute payment is the amount over the base amount (the average annual compensation for services includible in the individual’s gross income over the most recent 5 tax years)”.

Previously, these excess golden parachute payments were reported in Box 14 of 1099-MISC. 1099-NEC, Box 3 was reserved for future use. Effective tax year 2025 the IRS reassigned excess golden parachute payments to Box 3 of Form 1099-NEC.

When You Shouldn’t Use 1099-NEC Box 3

Figuring out what goes in each box can be confusing. When it comes to Box, remember that the following transactions aren’t meant to go in it:

• Regular payments to independent contractors or freelancers for services
• Expense reimbursements
• Bonuses paid to contractors
• Prize or award payments
• Settlement payments
• Anything your AP team would normally code as general vendor spend

The Box 3 Confusion

The confusion arises when your AP team assumes “other income” goes in 1099-NEC Box 3. That’s incorrect. When they say Box 3 for other income, they mean Box 3 on Form 1099-MISC. So as a simple rule of thumb:

• Payments for contractor services: Form 1099-NEC, Box 1
• Miscellaneous income categories including “other income”: Form 1099-MISC, Box 3
• Payments made by card or through a third-party platform: Form 1099-K (typically filed by the payment processor).

Compliance Workflow for Payers

You can’t streamline your 1099-NEC filings when the tax season comes around. Building good habits while collecting and maintaining clean records all year round is the key. Here’s a simple process that payers can rely on to ace 1099-NEC filing.

For each and every vendor you deal with, make sure that you collect and track these information:

• Legal name, TIN and address validated with a W-9
• Entity type: individual, sole proprietor, partnership, corporation and so on
• Payment category: Services, rent, other income, or similar
• Payment method: ACH, check, or wire versus card or third-party platform
• Any backup withholding if applied during the year

Once your groundwork in in place the filing process is pretty simple.

1. The first step is to collect completed W-9s from every nonemployee and run TIN matching. Do it at onboarding and don’t wait until year-end to chase these down.

2. The next step is to aggregate payments by vendor. If the combined amount reaches $2,000 or more (for 2026 payments) or $600 or more (2025 payments), a 1099-NEC is required.

3. Enter amounts in the correct boxes. This is where the year-round tracking pays off:

• Box 1: Enter the total amount paid to nonemployees for services
• Box 2: Check this box if you sold $5,000 or more in consumer products to the recipient for resale
• Box 3: Report excess golden parachute payments if applicable. Remember that this applies to a narrow set of executive compensation situations. Not routine vendor payments.
• Box 4: Enter any backup withholding amount if withholding was applied
• Boxes 5-7: Complete state information if your state requires it.

4. Once you’re done filling out the form, review all details before submitting to catch any mismatched TINs, missing information, or misassigned boxes.

5. Transmit Copy A to the IRS and send Copy B to the recipients before the January 31 deadline. File your 1099-NEC forms electronically if you have 10 or more return in total.

6. Retain all filed forms and supporting documentation for at least 3 years from the due date of the return and keep them for 4 years if backup withholding was imposed.

Real-World Examples

Here are some scenarios from real life for you to understand how 1099-NEC reporting works.

1. A business pays $4,000 to a freelance web developer to work on new features for an app. The payment is made via ACH in 2026.

Correct action: File 1099-NEC, Box 1 since the payment made to the nonemployee is for services.

2. A company undergoes acquisition and makes excess golden parachute payment to a departing executive as part of the deal.

Correct action: Might have to file 1099-NEC with the amount in Box 3 of the form. These kind of situations are rare and require careful legal and financial evaluation.

3. A small business makes a payment of $2,000 to a consultant for a contractual work via credit card.

Correct action: Generally, the payment processor will report the transaction using Form 1099-K. So, you’re off the hook. If you also report it on 1099-NEC, you risk double-reporting and vendor disputes.

4. A business pays $3,500 to an attorney for legal advice.

Correct action: It has to report the amount in Box 1 of 1099-NEC. This is irrespective of whether the attorney operates as a partnership or a corporation.

5. A speaker was paid $1,000 thrice in 2026 for presenting at multiple events. He was paid via check.

Correct action: The aggregate of the payments is $3,000 which is above the reporting threshold for 2026. So, it must be reported in Box 1 of 1099-NEC as it’s for services.

FAQs

1. If I made multiple payments to a contractor, should I aggregate invoices?

Yes. You must calculate the total amount paid to each contractor throughout the year to see if it reaches the reporting threshold.

2. What should I do if I discover an error after filing?

File a new ‘CORRECTED’ 1099-NEC as soon as you find the error and furnish the updated form to the recipient as well.

3. Does “other income” go in Box 3 of 1099-NEC?

No. It belongs Form 1099-MISC, Box 3. Box 3 on 1099-NEC is only for excess golden parachute payments.

4. How long should I keep records?

Always retain filed forms and other supporting documents such as W-9s, payment receipts, etc., for at least 4 years. They’ll come in handy in case of audits or corrections.

5. Can 1099-NEC penalties be waived by the payer?

Yes, businesses can request penalty abatement to the IRS by showing a reasonable cause and providing supporting documentation.