Get ready for the new 1099-NEC and changes to 1099-MISC filing

1099-NEC Changing in 2021

New Form 1099-NEC

The IRS has made big changes to the 1099-MISC form by reviving the 1099-NEC form.  Beginning with the 2020 tax year (to be filed by February 1, 2021) the new 1099-NEC form will be used for reporting nonemployee compensation (NEC) payments.  Previously NEC was reported in Box 7 of the 1099-MISC form. These payments will now be reported in Box 1 of the 1099-NEC form.  

There are several parts of the new 1099-NEC form to take note of.

    • Box 1 is where you key in the dollar amount of nonemployee compensation.
    • Box 4 is used for any amount you held back to comply with backup withholding requirements.  For more on backup withholding, see our blog article What is backup withholding?  
    • Boxes 5-7 are used to report any state withholding.

Brand New Form 1099-NEC for Tax Year 2020  

What is nonemployee compensation?

The IRS defines nonemployee compensation (NEC) in the 2020 Instructions for Forms 1099-MISC and 1099-NEC.  If the following four conditions are met, you must generally report a payment as NEC.

    • You made the payment to someone who is not your employee.
    • You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
    • You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
    • You made payments to the payee of at least $600 during the year.

Examples of nonemployee compensation that are now reported in box 1 of Form 1099-NEC include:

    • Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.
    • Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service.
    • Director’s fees and other remuneration

Other payments reported on Form 1099-NEC

In addition to nonemployee compensation, there are some other payments reported in box 1 of Form 1099-NEC.

    • Prizes and awards for services performed by nonemployees
    • Cash payments for fish
    • Payments by a federal executive agency for services
    • Gross oil and gas payments for a working interest
    • Taxable fringe benefits for nonemployees

You must also file Form 1099-NEC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

When do I have to file the 1099-NEC? 

Form 1099-NEC should be filed with the IRS on paper or electronically by January 31st of each year (February 1st in 2021).  A copy of Form 1099-NEC should also be sent to your vendors and independent contractors by January 31st of each year (February 1st in 2021)  There is no automatic extension available for the 1099-NEC form.

Not seen since 1982 

Form 1099-NEC last seen in 1982Form 1099-NEC was last seen in 1982 when Michael Jackson released Thriller, the Dow Jones Industrial Average closed at 1046, and the Commodore home computer was launched!  (For more memories from 1982 click here.)  After 1982 the form was replaced with the all-encompassing Form 1099-MISC. 

State requirements

Individual state requirements are not yet known as the IRS has not communicated whether the 1099-NEC form will be included in the combined federal/state filing program.   Publication 1220 was revised in September 2020 and the 1099-NEC was still not listed as being included in this program.  Filers will need to continue to check for IRS updates as well as individual updates from their specific states.

Background

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) moved the due dates for filing Forms 1099-MISC that report nonemployee compensation in box 7 with the IRS up to January 31st.  It had previously been February 28th (paper) and March 31st (electronic) deadlines.  However, the due date for other 1099-MISC reportable payments not reported in box 7 remained due to the IRS by February 28th or March 31st.   This has caused some confusion as companies might have to report two times to the IRS for the same payee unless they file everything on January 31st.

The main reason the IRS filing deadline was moved up to January 31st was to help the IRS combat fraud.   Companies were required to send employees their W-2 and non-employees their 1099-MISC by January 31st.  However, the companies were not required to file with the IRS until February 28th (paper) and March 31st (electronic).  This left a window open where refunds could be issued before the IRS could confirm reporting income.

Filers have also run into some issues with the IRS if they file late box 7 1099 forms together with on-time non-box 7 1099 forms after January 31st.  All the forms, including the non-box 7 1099 forms, could be considered late and subject to penalties.

Revised 1099-MISC

Due to the creation of Form 1099-NEC, Form 1099-MISC has been revised and box numbers have been rearranged as follows.

    • Payer made direct sales of $5,000 or more (checkbox) in box 7.
    • Crop insurance proceeds are reported in box 9.
    • Gross proceeds to an attorney are reported in box 10.
    • Section 409A deferrals are reported in box 12.
    • Nonqualified deferred compensation income is reported in box 14.
    • Boxes 15, 16, and 17 report state taxes withheld, state identification number, and amount of income earned in the state, respectively.

Revised Form 1099-MISC for Tax Year 2020

Corrections

If you are making a correction on a prior year 1099 form, use that prior year 1099 form.  If you are making a correction for the current year, use that current year 1099 form.   The IRS says in the General Instructions for Certain Information Returns that filers should “not use prior year forms unless you are reporting prior year information. Do not use subsequent year forms
for the current year. Because forms are scanned, you must use the current year form to report current year information.

Conclusion

Companies will start reporting on the new Form 1099-NEC in January 2021. Companies will be required to report all nonemployee compensation payments in box 1 on Form 1099-NEC rather than in box 7 of Form 1099-MISC.    Most other payments currently reported on Form 1099-MISC will continue to be reported on Form 1099-MISC as done previously we the exception of several box number changes.  

For the typical standard main street company, I think this will initially make the 1099 process substantially more confusing and time-consuming.  Currently, most companies can just report everything to the IRS on January 31st at one time if they plan ahead.  Payees then just receive one 1099-MISC form.  Now almost every company will have to issue both 1099-MISC and 1099-NEC forms and many of their payees will receive both forms.  In addition, smaller vendors and independent contractors will have never seen Form 1099-NEC, causing even more confusion.   The best course of action is to fully understand the new process,  plan ahead for the changes, and clearly communicate the change to your vendors and independent contractors before you issue the new 1099-NEC form for the first time.

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Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

 

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