January 5, 2021
For several years, the IRS has been working to require Form 1099-NEC to be issued by businesses making certain payments. In conjunction with that, due dates for this and other 1099 forms have been in flux. These changes are now effective for the 2020 tax year.
Businesses that historically prepared only a 1099-MISC to independent contractors (and certain others), now need to decide if they need to use the new IRS Form 1099-NEC and/or the newly revised IRS Form 1099-MISC. For non-employee compensation paid during 2020, payers must provide Form 1099-NEC (instead of Form 1099-MISC) to both the recipients and the IRS no later than February 1, 2021, and they must be careful to correctly report items in the redesigned 1099-MISC due in March 2021.
Which payments are reported on Form 1099-NEC?
Businesses must provide a Form 1099-NEC when all of the following apply to payments made in 2020:
- The payment is made to someone performing services as a non-employee
- The payment is for services performed in the course of the entity’s trade or business
- The payment is for $600 or more for the year
Some examples of common payments that must be reported on Form 1099-NEC include:
- Fees paid to members of the business’s board of directors who are not employees
- Fees paid to independent contractors
- Commissions paid to nonemployee salespeople
- Professional service fees paid to attorneys (including payments made to corporations)
- Fees paid by one professional to another (such as “fee-splitting” arrangements)
- Payments for services, including payments for parts or materials used to perform the services, if they were incidental to the service
Businesses must also file Form 1099-NEC for anyone from whom they withheld federal income tax under back up withholding rules, for any amount (even if under $600).
Nonprofit organizations are considered to be engaged in a trade or business and should use Form 1099-NEC. Federal, state, or local government agencies should also use Form 1099-NEC.
The deadline for submitting Form 1099-NEC to recipients and the IRS is January 31, 2021.
Automatic extensions for Form 1099-NEC are not available; however, extensions using Form 8809 may be requested.
Form 1099-NEC is not actually “new,” since the IRS used it until 1982. The IRS revived it starting in 2020 to keep better track of non-employee compensation. This change was driven by the gig economy and employers’ increased use of independent contractors. From 1982 to 2019, non-employee compensation was included on Form 1099-MISC.
IRS Publication 1220 indicates that the IRS will not be forwarding copies to states’ revenue departments; therefore, taxpayers need to be aware of any state filling requirements.
Redesigned 2020 Form 1099-MISC
Businesses should also be aware that the IRS redesigned the 2020 Form 1099-MISC due to the creation of Form 1099-NEC. Specifically, the IRS rearranged several box numbers on the 2020 Form 1099-MISC, so payers should use:
- Box 7 (check box) if payer made sales of $5,000 or more to the recipient for them to resell
- Box 9 for crop insurance proceeds
- Box 10 for certain payments to an attorney (that are not reported on Form 1099-NEC)
- Box 12 for IRC Section 409A deferrals (this would only apply in rare situations that are not reportable on Form 1099-NEC)
- Box 14 for nonqualified deferred compensation income (this is optional and would only apply in rare situations that are not reportable on Form 1099-NEC)
- Boxes 15, 16 and 17 for state taxes withheld, state identification number and amount of income earned in the state, respectively
Paper-filed Form 1099-MISC must be filed by March 1, 2021. E-filed Form 1099-MISC must be filed on or before March 31, 2021.
Corrections to Form 1099-MISC for tax years 2019 and earlier should be made on the form’s old version.
Businesses cannot download copies of Form 1099-NEC and 1099-MISC suitable for filing with the IRS from the IRS website. Do not print and file copy A downloaded from the IRS website. However, Copies B, C, 1, and 2 have been made fillable online in a PDF format available IRS.gov/Form1099NEC and at IRS.gov/Form1099MISC . These fillable online copies are only appropriate for furnishing statements to recipients, state governments and for retaining in your own files.
The filing deadline for Form 1099-NEC is on or before February 1, 2021, using either paper or electronic fillable copies. Refer to IRS instructions.
The filing deadline for Form 1099-MISC is March 1, 2021 if you file on paper, or March 31, 2021 if you file electronically. Refer to IRS instructions.
To avoid confusion, consider including a standardized note of explanation to recipients of your 1099-MISC and 1099-NEC.
Ensure your staff is updated and comfortable with identifying employee versus nonemployee compensation and the updated IRS forms.
If a company fails to issue a 1099-MISC or NEC, a penalty may be assessed, ranging from $30 to $100 per form, depending on how late it is ultimately issued. If a company intentionally disregards the requirement to provide a correct 1099, the penalty is $250 per form.
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Asheville Boone Marion
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