Tax News: New IRS Form 1099-NEC

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Many people have never seen Form 1099-NEC. That’s because it hasn’t been used since AT&T agreed to divest itself into 22 subdivisions in 1982. From then until now, business owners have used Form 1099-MISC to report non-employee compensation. Starting in tax year 2020 (reporting in 2021), Form 1099-NEC is back.

You may still use Form 1099-MISC to report other payment types, like royalties and rents, which means that Form 1099-NEC is not a complete replacement for Form 1099-MISC. On Form 1099-NEC, the NEC stands for Non-employee Compensation. Form 1099-NEC is only replacing the use of Form 1099-MISC for reporting independent contractor payments. The two forms remain interconnected to the extent that the IRS provides a single instruction sheet explaining both forms.

The Differences Between Form 1099-NEC and Form 1099-MISC

The core difference between the two forms is that beginning with tax year 2020, you need to separate out non-employee compensation payments from all of your other Form 1099-MISC payments.

The only purpose of Form 1099-NEC is to report non-employee compensation along with related information such as state and federal income tax withheld (if any). The reasons that you need to file Form 1099-NEC are:

  • You paid compensation totaling $600 or more during the year that to someone who is not your employee.
  • You made payments as a regular business service or labor.
  • Payments went to individuals, partnerships, or an estate (ask a tax professional about the few cases when Form 1099-NEC applies to a corporation).

Reasons not to file Form 1099-NEC

  • Total payments to an individual or entity are less than $600.
  • Wages paid to employees (reported on Form W-2).
  • If you made payments to a corporation (including an LLC taxed as a C or S corporation).
  • Payments for merchandise, telephone, freight, storage, and similar items.
  • If you made payments of rent to real estate agents or property managers.
  • Other obscure payments such as military differential wage payments or travel reimbursement.

Why to still file Form 1099-MISC in addition to Form 1099-NEC

All other income paid and typically reported on a 1099-MISC still applies. This includes:

    • Rent for office space that is not paid to a real estate agent or property manager.
    • Prizes and awards that are not compensation for work.
    • Medical and health care payments.
    • Payments to an attorney.
    • Crop insurance proceeds.
    • Section 409A deferrals (non-qualified deferred compensation arrangements).
    • Other income not reported in one of the other boxes on the form.

You’ll distribute multiple copies of each form. Individual copies go to the IRS, your state tax department (if applicable), the independent contractor, and a copy for your recorders.

Filing Dates Also Changing

Businesses must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. This applies to either paper or electronic filing. There’s no automatic 30-day extension to file Form 1099-NEC. You must also provide your contract workers with their copy of the form by February 1, 2021.

Form 1099-MISC must be submitted to the IRS by March 1, 2021, if you file on paper. But the date is March 31, 2021, if you file electronically. However, different dates apply to when the form must be sent to your contract workers. Contract workers must receive Form 1099-MISC by February 1, 2021, if there are no entries in boxes 8 or 10. (Box 8 is for substitute payments in lieu of dividends or interest and Box 10 is gross proceeds paid to an attorney.) If there are entries in either Box 8 or 10, contract workers must receive Form 1099-MISC by February 16, 2021.

Companies that need more time to file 1099s, can send the IRS form 8809 to apply for an extension. But you don’t have to wait for the deadlines. Rather than wait until January, February, and March, you might be able to begin filing your forms now. As long as an independent contractor has completed all work for the calendar year and you have all the required information, you can get started.

Why Are These Changes Happening?

The primary reason that Form 1099-NEC has been revived is that the IRS had some time-management and administrative issues resulting from the Protecting Americans from the Tax Hikes Act of 2015 (PATH Act). This all started back in 2015 when the PATH Act was enacted. This legislation required the IRS to change the due date for Form 1099-MISC containing data in box 7 (non-employee compensation) from February 28 to January 31. The option for an automatic 30-day filing extension was also eliminated.

This resulted in the IRS mistakenly penalizing businesses who filed Forms 1099-MISC after January 31. The penalties were with and without data in box 7. Essentially, the IRS thought the filings were late. As a result and for the benefit of easier processing by the IRS, Form 1099-NEC was brought back. Form 1099-NEC separates non-employee compensation out of the old version of Form 1099-MISC, as well as staggers the filing due dates.

Form 1099-MISC box 7 updated to read: “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale”. This replaced the former “Non-employee compensation.” Report non-employee compensation only on Form 1099-NEC Box 1.

Penalties for Filing Late or Incorrect Information

The filing of non-employee compensation is now more complicated. Additionally, there are also penalties for filing late, missing information, and incorrect information.

The penalty is $50 per form if you file correct information within 30 days past the due dates. The penalty becomes $110 per form if you correctly file more than 30 days after the due date but by August 1. This increases to $270 per form if you file after August 1, if you don’t file correct information, or you don’t file the forms.

Your best approach to work through these changes and avoid penalties is to begin preparing for filing season in advance.

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