IRS Proposes Big Changes to 1099 Forms

1099-NEC Changing in 2021

New draft Form 1099-NEC

The IRS has proposed making big changes to 1099 forms by reviving Form 1099-NEC.  They just recently posted a proposed draft Form 1099-NEC.  Note that a draft IRS form is typically issued by the IRS to solicit comments from the public for a defined period of time.  The IRS generally does not release draft forms until they believe that all needed updates have been incorporated, however, sometimes unexpected issues arise, or legislation is passed.  Drafts of forms and their related instructions often have some changes before their final release.  Once all comments are received the IRS reviews the form, makes any necessary updates, and then issues the final form after receiving OMB approval.   At present, Form 1099-NEC will not be ready for use until calendar year 2020 with filing due dates starting in January 2021. 

What is nonemployee compensation?

The IRS defines nonemployee compensation (NEC) in the 2019 Instructions for Form 1099-MISC.  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.

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. 

Background

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) moved the due dates for filing Forms 1099-MISC that report non-employee 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.

Conclusion

There is no immediate impact from the proposed draft form as companies will not start reporting on the new Form 1099-NEC until January 2021, if approved.  However, if a final form is issued, companies will be required to report all NEC payments in box 1 on Form 1099-NEC rather than in box 7 of Form 1099-MISC.   Payments made for direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale will be reported in box 2 of Form 1099-NEC.   All other payments currently reported on Form 1099-MISC will continue to be reported as done previously.  

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 when you issue the forms for the first time.

Draft IRS instructions

Here are the new IRS instructions currently listed on the draft Form 1099-NEC for additional reference.

Box 1. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 1 may show cash you received for the sale of fish. If the amount in this box is self-employment (SE) income, report it on Schedule C or F (Form 1040 or 1040-SR), and complete Schedule SE (Form 1040 or 1040-SR). You received this form instead of Form W-2 because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report this amount on the line for “Wages, salaries, tips, etc.” of Form 1040, 1040-SR, or 1040-NR. You also must complete Form 8919 and attach it to your return. If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report this amount on the “Other income” line of Schedule 1 (Form 1040 or 1040-SR or Form 1040-NR)

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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.