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

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. 

You may be required to file Form 1099-NEC directly with your state!

Historically the IRS has forwarded a number of 1099 form types, including Form 1099-MISC, to a large number of states with the IRS Combined Federal/State Filing Program. Filers did not have to file these 1099 forms with the states that were in the program, saving a tremendous amount of time and effort.

In tax year 2020, the IRS began requiring companies to file the new Form 1099-NEC.  When Publication 1220 was issued on October 26, 2020 the IRS stated that “Form 1099-NEC is not part of the Combined Federal/State Filing (CF/SF) Program.”  With that announcement individual states began issuing their own state 1099-NEC filing requirements.  To date, thirty-three states have issued 1099-NEC state requirements.  And many of these states have requirements for nonresidents as well as residents.

If your are filing Form 1099-NEC it is critical that you check your state requirements.  Most states can assess punitive penalties and interest if the state filing requirements are not followed. For the most up-to-date filing requirements visit the state compliance section of the W9manager Academy.

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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    • Sync your vendors – Use our .csv import or directly integrate with QuickBooks and Xero. (Oct 2020)
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    • Track W-9 status – Always know the W-9 status for your vendors in an instant.
    • Determine 1099 reportability – Let W9manager tell you if vendor payments have to be reported on a 1099-MISC/NEC.
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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.

 

Avoid the penalty, 1099-MISC and 1099-NEC due dates for 2021

The importance of filing timely

The IRS has gotten serious about 1099-MISC and 1099-NEC due dates.  Penalties have risen significantly and they apply separately to copies sent to recipients (i.e. vendors) and the IRS.  Penalties for late filing that can be as high as $560 for each 1099-MISC or 1099-NEC sent late to a recipient PLUS another $560 for each form not filed timely with the IRS.  This article only looks at filing deadlines for Form 1099-MISC and Form 1099-NEC.  See our blog article on IRS penalties for more information on penalties. 

RECIPIENT 1099-MISC and 1099-NEC due dates

If a payment is required to be reported on a 1099 form you must send Copy B of the 1099 to the party that was paid.  You can avoid late-filing penalties by furnishing 1099s to your recipients timely.    

February 1, 2021 – Form 1099-MISC (except box 8 and 10) and Form 1099-NEC sent to the recipient

February 16, 2021 – Form 1099-MISC with only box 8 & 10 sent to the recipient.

Be certain that you properly address and mail out forms on or before the due date.  If you are filing electronic statements, be certain to post the forms to a website on or before the due date.  1099 forms must be mailed to the recipient unless the recipient has signed the specific IRS consent form and you follow the specific consent requirements.

IRS 1099-MISC and 1099-NEC due dates

Due dates to file with the IRS vary by 1099 form filed and if the forms were filed by paper or electronically.  If a payment is required to be reported you must send Copy A of each 1099 (and summary Form 1096 if on paper) to the IRS.  Also, note that companies with 250 or more information returns are required by the IRS to file them electronically.

February 1, 2021 – 1099-NEC: Paper & electronic filed with the IRS.

March 1, 2021 – 1099-MISC: Paper filed with the IRS.

Marcy 31, 2021 – 1099-MISC: Electronic filed with the IRS.

 

 Timely filing with the IRS

You will meet the requirement to file timely if the form is properly addressed, postmarked, and mailed using the official mail of the United States, or private delivery service (PDS) designated by the IRS on or before the due date. If the regular due date falls on a Saturday, Sunday, or legal holiday in the District of Columbia or where the return is to be filed, file by the next business day. A business day is any day that is not a Saturday, Sunday, or legal holiday in the District of Columbia or where the return is to be filed.

Filing an extension

You can request a 30-day extension to furnish Form 1099 to your recipients by sending a letter to the IRS.  Be sure to mail your request by the due date of the form.  For more information see the section, Extension of time to furnish statements to recipients, in part M of the General Instructions for Certain Information Returns.  In addition, you can also request an automatic 30-day filing extension with the IRS by completing Form 8809.  There is no automatic extension available for Form 1099-NEC.

As soon as you know that a 30-day extension of time to file is needed, file From 8809. 

    • Follow the instructions on Form 8809 and mail it to the address listed in the instructions on the form. See the instructions for Form 8809 for more information.

    • You can submit the extension request online through the FIRE System. You are encouraged to submit requests using the online fillable form. See Pub. 1220, Part B, for more information on filing online or electronically.

Where to file

All paper information returns will be filed with one of three IRS centers depending on your state.  The centers are Austin, TX, Kansas City, MO, and Ogden, UT.  See part D of the General Instructions for Certain Information Returns and Form 1096 for more information.  We recommend filing electronically with our 1099 partner tax2efile.com or directly with the IRS FIRE system.  Simply export the 1099 report from W9manager, add the vendor payment amounts and import the spreadsheet straight into tax2efile. 

Electronic filing threshold

The threshold number requiring electronic filing for tax year 2020 forms listed in the Guide to Information Returns table found in the General Instructions for Certain Information Returns remains at 250 at this time, however, the Taxpayer First Act (P.L. 116-25, sec 2301) has been enacted to lower the threshold, but not until regulations are issued. We expect the regulations lowering the level to 100, with respect to the 2021 forms listed in the Guide to Information Returns table found in these instructions, due to be filed in 2022, with further lowered limits in future years.  See IRS.gov/Form1099 to keep up with these regulations and the limits change.  The rule applies separately to each type of form.

State filing

Note that the information above only relates to filing with the IRS.  You may also need to file an information return with your state government.  The state filing requirements may be satisfied with the Combined Federal/State Filing Program.  Through this program, the IRS will forward information returns like the 1099-MISC to participating states.  You must file electronically to participate in this program. See Part A. Sec. 11 of IRS Publication 1220 for a list of participating states.  Contact your state for requirements if they are not a participating state.  

At this time the IRS will NOT be including Form 1099-NEC in the Combined Federal/State Filing Program.  Many states are requiring that Form 1099-NEC now be directly filed with the state.  Visit the W9manager Academy state compliance section for a complete list of requirements by state. 

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.

IRS proposes changes to electronic reporting requirements

The IRS has proposed regulations amending the rules for determining whether information returns must be filed electronically.  The proposed regulations would require that all information returns, regardless of type, be taken into account to determine whether a person meets the 250-return threshold and, therefore, must file the information returns electronically. The proposed regulations also would require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed.

In the past, the 250-or-more electronic requirement applied separately to each type of form.  For example, if you had to file 500 Forms 1098 and 100 Forms 1099-A, you were required to file Forms 1098 electronically, but you were not required to file Forms 1099-A electronically.

To view the proposed rule click here.

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. This article is also not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.