Changes are in store this tax season for the more than 70 percent of filers in 2019 who reported information in Box 7 of Form 1099 MISC. Beginning for the tax year 2020 there is a new Form 1099 NEC to report nonemployee compensation. In the past, payments of at least $600 to attorneys, independent contractors, or directors, among others, were required to be reported on Form 1099-MISC. Other payments, such as rents, royalties, and prizes, also were reported on this same form, but in different boxes.
Starting tax year 2020, any business, regardless of size, that pays at least $600 for services performed in the course of their trade or business by a person who is not their employee is required to file Form 1099-NEC.
Why the Change?
Prior to tax year 2020, nonemployee compensation was reported in Box 7 on Form 1099-MISC. However, with the passing of the Protecting Americans from Tax Hikes (PATH) Act in 2015, the due date for reporting amounts in Box 7 was accelerated to Jan. 31, while the deadline for reporting most other information on Form 1099-MISC remained at Feb. 28, if filing on paper, and March 31, if filing electronically.
Here’s where things got problematic: If a filer submitted a batch of 1099-MISC forms to the IRS after Jan. 31 and any of the forms had an amount in Box 7, the IRS would send a late filing notice to the filer for the entire batch. The filer would then have to rectify the situation with the IRS, indicating which forms in the batch were actually filed late.
To alleviate this cumbersome process, the IRS reinstated Form 1099-NEC (last used tax year 1982) to report nonemployee compensation separately from other types of income reported on Form 1099-MISC, and imposed an earlier due date. Since Jan. 31, 2021 falls on a Sunday, Form 1099-NEC must be filed on or before Feb. 1, 2021, using either paper or electronic filing procedures.
As noted earlier, the reinstatement of Form 1099-NEC will be a blast from the past for many accountants, as the form was last used in the early 1980s when Ronald Reagan was president. The older version did, however, have fewer boxes to fill out compared with the new Form 1099-NEC.
Who Must File?
As previously stated, the new Form 1099-NEC impacts many businesses, filers ranging from small businesses to Fortune 500 companies. More specifically, the IRS indicates that businesses should file the new form for each person whom they have paid at least $600 in:
- Services performed by someone who is not their employee (including parts and materials) (box 1);
- Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish (box 1); or
- Payments to an attorney for services (box 1).
Businesses must also file Form 1099-NEC for each person from whom they have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.
It is important to file on time, with the correct information, to avoid penalties. The amount of the penalty, which can be as high as $280 per information return, is based on when the filer submits a correct information return. If the failure to file a correct information return is due to intentional disregard, the penalty is at least $560 per information return with no maximum penalty.
Elimination of 30-Day Extension
In addition to accelerating the due date for filing Form 1099 that includes nonemployee compensation (NEC) from Feb. 28 to Jan. 31, the IRS also eliminated the automatic 30-day extension. There may, however, be some relief for those impacted by COVID-19, as well as those impacted by the recent West Coast wildfires.
The IRS does allow for an extension to file if the filer meets one of the five criteria outlined on Form 8809 Application for Extension of Time To File Information Returns. Some of the criteria listed are:
- The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable;
- Fire, casualty, or natural disaster affected the operation of the filer; and
- Death, serious illness, or unavoidable absence of the individual responsible for filing the information returns affected the operation of the filer.
The Fate of Form 1099-MISC?
All of the other income typically reported by a filer on Form 1099-MISC will stay on that form. Many of the boxes, however, have been rearranged.
According to the IRS, changes in the reporting of income and the form’s box numbers are 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 (for settlements).
- Section 409A deferrals are reported in box 12.
- Non-qualified 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.
Form 1099-MISC must be filed by March 1, 2021, if filing on paper, or March 31, 2021, if filing electronically.
It is important to note that e-filed Form 1099-NEC will not be forwarded to states. What does this mean? In September, the IRS released its annual Publication 1220, which revealed that the 1099 NEC will not be included in the IRS 1099 Combined Federal/State Filing Program (CF/SF).
Under the CF/SF Program, the IRS forwards data from a number of key forms to the appropriate states, but it will not do so for Form 1099-NEC. As a result, businesses could miss key state filing deadlines, leading to unexpected penalties. This means 1099-NEC filers will need to find a state filing option separate from the CF/SF Program.
If you need assistance or would like to engage our firm to help guide you through the reporting process, please contact us!