The IRS is going back to the future in an effort to avoid fraud, deadline confusion, and filing errors related to reporting nonemployee compensation in 2020. They are reintroducing Form 1099-NEC, a form that hasn’t been used since 1982 and that was the predecessor to Form 1099-MISC. In addition to new federal and state filing requirements and the related redesign of Form 1099-MISC, the new form brings a number of compliance matters for employers to consider as they prepare for filing in 2021.
What Gets Reported on Form 1099-NEC?
As of January 2021, employers will file nonemployee compensation on the new form, which replaces compensation formerly reported in Box 7 on Form 1099-MISC.
Nonemployee compensation of $600 or more will be reported on Form 1099-NEC, Box 1 for:
- services performed, including parts and materials, by a non-employee;
- cash payments for purchases from anyone engaged in the trade or business of fish or other aquatic life; or
- payments to an attorney, law firm, or other provider of legal services, or attorneys’ fees paid in the course of the organization’s trade or business.
Nonemployee compensation, regardless of the amount of the payment, will be reported on Form 1099-NEC, Box 4 for:
- each person from whom the company has withheld any federal income tax under the backup withholding rules.
Federal Forms 1099-NEC must be filed on or before February 1, 2021, regardless of paper or electronic filing. An automatic extension is not available for Form 1099-NEC; however a request for an extension of time to file may be submitted on paper using Form 8809.
State Filing Requirements
Unfortunately, IRS Publication 1220 revealed that information reporting data for the new Form 1099-NEC will not be included in the Combined Federal/State Filing (CF/SF) program, which means the IRS will not be forwarding copies to state departments of revenue. Many states have already issued their own reporting requirements; however, few New England states have issued theirs.
Although Massachusetts, Maine, Rhode Island, Connecticut, and Vermont all have 1099-MISC reporting requirements, Vermont is the only state among them with official guidance on record for Form 1099-NEC reporting. The VT Department of Taxes suggests filing be done electronically at myVTtax no later than February 1, 2021. New Hampshire does not require Form 1099-NEC or 1099-MISC to be filed, as there is no state income tax.
What’s new with Form 1099-MISC?
Form 1099-MISC has been redesigned to account for the change in reporting as well. Some of the form’s box numbers now correspond to different data; for example, Box 14 is now for reporting nonqualified deferred compensation income, and Box 9 is now for reporting crop insurance proceeds. Box 7, which was previously used to report nonemployee compensation, now contains a checkbox to indicate whether the payer made direct sales of $5,000 or more.
As of January 2021, employers will use Form 1099-MISC to report:
- at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
- direct sales of at least $5,000 of consumer products to a buyer for resale, if not a permanent retail establishment; or
- at least $600 in:
- prizes and awards;
- other income payments;
- medical and health care payments;
- crop insurance proceeds;
- cash payments for fish or other aquatic life purchased from anyone engaged in the trade or business of catching fish;
- fishing boat proceeds;
- cash paid from a notional principal contract to an individual, partnership, or estate; or
- payments to an attorney.
When paper-filed, Federal Form 1099-MISC must be filed by March 1, 2021. If e-filed, Federal Form 1099-MISC must be filed on or before March 31, 2021.
The IRS also specified that all corrections for tax years 2019 and earlier pertaining to Form 1099-MISC, Box 7 should be made on the old version of Form 1099-MISC.
Composite Recipient Statements & Multilevel Marketing Filers
For payees that receive nonemployee compensation and other income reportable on the Form 1099-MISC in 2020, reporting may not be done using a single recipient statement, nor may statements be combined into a substitute recipient statement. Nonemployee compensation will be reported on Form 1099-NEC, and any other 1099 reportable income will be reported on Form 1099-MISC.
The same is true for multilevel marketing filers (MLMs). Form 1099-NEC does not include a checkbox for indicating when a “payer made direct sales of $5,000 or more of consumer products to a buyer for resale.” Since nonemployee compensation is now reported on Form 1099-NEC, a separate Form 1099-MISC will need to be filed, even though “payer made direct sales of $5,000 or more of consumer products to a buyer for resale” is the only item indicated on the form.
Preparing for the Change
Reconfiguration of your accounting systems and your filing programs will be needed. Contact your providers and tech-support to ensure necessary flags, reporting, and mapping updates will be made by January, or for their suggestions throughout the transition if there are items they have not yet updated.
Make sure your staff has been properly trained to distinguish employee compensation from nonemployee compensation; on the ins and outs of Form W-9; on backup withholding; and on how to use TIN matching to avoid penalties for B Notices.
Proactively identify your vendors that are going to require both forms. To avoid confusion, consider sending them notification or preparing a note to be issued with their forms explaining why they look different this year.
Contact Commonwealth Payroll & HR
Commonwealth is here to help. We can assist you in your planning and preparation efforts as you transition to the new nonemployee compensation reporting requirements. To find out more, contact us today.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.