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What is IRS Form 1099-NEC

What is IRS Form 1099-NEC – and how does it affect preparation of the 1099-MISC and non-employee compensation

Business owners and tax professionals alike: take notice. As we all have been consumed by extended deadlines and tax planning changes related to the COVID-19 pandemic, a change for 2020 may have gone unnoticed.

Effective for payments made beginning January 1, 2020, the IRS has released the 2020 Form 1099-NEC. The new form replaces Form 1099-MISC for reporting non-employee compensation (NEC) in Box 7, and the redesigned Form 1099-MISC’s new role will be to report all other types of compensation.

You may be asking why now? In 2015, when The Protecting Americans from Tax Hikes Act (the PATH Act) was enacted, the IRS changed the due date for Form 1099-MISC containing data in box 7 (non-employee compensation) from February 28 to January 31. The agency also eliminated the option for an automatic 30-day filing extension. This created administrative issues on the IRS side because if a business owner filed a group of 1099-MISC’s after January 31 that contained 1099-MISCs with and without data in box 7, the IRS was mistakenly penalizing the business owner for filing ALL 1099s late.

To eliminate these types of issues, the IRS introduced Form 1099-NEC. In fact, I should say “reintroduced” as the 2020 Form 1099-NEC is based on an old form that has been out and was last used in 1982. This reintroduction now effectively separates non-employee compensation (box 7) from the 1099-MISC, as well as staggers the filing due dates.

2020 Form 1099-NEC
Who should file? Let’s refresh our understanding of non-employee compensation as it relates to the requirements for filing a 1099-NEC in 2020.

A non-employee is a provider you paid services for in 2020. Examples of non-employees: independent contractors, freelancers, vendors, consultants, and other self-employed individuals.

A business owner is required to file a 1099-NEC if they:

  • Pay at least $600 in (box 1):
    • Services performed by someone who is not your employee (including parts and materials)
    • Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade of business of catching fish
    • Payments to an attorney – NOTE: report only attorney fees for legal service here, see Form 1099-MISC (box 10) instructions for gross proceeds paid to attorneys.
  • Make payments to an individual, partnership, estate, or sometimes a corporation
  • Report any back up federal withholding if required under the backup withholding rules, regardless of the amount (box 4)
  • Has state reporting (box 5-7)
    • We advise connecting with your recipient’s state of residence for reporting requirements
    • For Pennsylvania – it is assumed the PA DOR will treat Form 1099-NEC the same as Form 1099-MISC with respect to reporting and non-residential withholding

A business owner is NOT required to file a 1099-NEC if:

  • Payments are below $600
  • Payments are made to a corporation
  • Payments are for merchandise, phone, freight, storage, or similar items
  • Payments are to a tax-exempt organization including tax-exempt trusts; federal, state, and local governments
  • Payments like rent, royalties, and gross proceeds from an attorney as they are filed on a 1099-MISC

Filing instructions for the 1099-NEC:

  • The recipient copies of the 1099-NEC are to be distributed by January 31
  • The IRS copy should be paper filed or electronically filed by January 31
    • Note: if any business files over 100 1099-NEC’s they must file them electronically
  • In the state of PA, the state copy of the 1099-MISC is also due by January 31. At this time, it is to be assumed 1099-NEC’s will also be due to PA by January 31.

Link to 2020 Form 1099-NEC

Link to 2020 instructions for Form 1099-NEC and 1099-MISC

Redesigned 2020 Form 1099-MISC
Who should file? Now that we know non-employee compensation does not belong on a form 1099-MISC in 2020, what does?

A business owner is required to file a 1099-MISC if it:

  • Pays at least $600 in:
    • Rent (box 1)
    • Prizes, awards, and other income (box 3)
    • Any fishing boat proceeds (box 5)
    • Crop insurance (box 9)
    • Section 409A deferrals (box 12)
    • Nonqualified deferred compensation (box 14)
    • Gross proceeds paid to attorneys (box 10) – NOTE: report only gross proceeds here such as in a settlement claim. Any attorney fees paid for legal services should be reported on the 1099-NEC (box 1)
  • Pays at least $10 in royalty income (box 2)
  • Reports any back up federal withholding if required under the backup withholding rules, regardless of the amount (box 4)
  • Has state reporting (box 15-17)
    • We advise connecting with your recipient’s state of residence for reporting requirements

A business owner is NOT required to file a 1099-MISC if:

  • Payments are under $600 (under $10 for royalties)
  • Payments made for personal payments
  • Payments related to non-employee compensation (report on 1099-NEC)

1099-MISC box 7 is now a check box if the payer made direct sales of $5,000 or more of consumer products to a buyer to a buyer (recipient) for resale.

Updated filing instructions for the 1099-MISC:

As mentioned, the goal of the IRS was to stagger the filings of the 1099-NEC and the 1099-MISC to avoid the administrative issues.

The filing requirements for the 1099-MISC are now updates as follows:

  • The recipient copies of the 1099-MISC are to be distributed by January 31.
  • The IRS copy should be paper filed or electronically filed by February 28 (previously January 31)
    • Note: if any business files over 100 1099-MISC’s they must file them electronically
  • At this time, it is to be assumed the state of PA will follow the IRS due date change, extending the due date for PA copy of 1099-MISC by February 28.

Link to redesigned 2020 Form 1099-MISC

Link to 2020 instructions for Form 1099-NEC and 1099-MISC

Pennsylvania tax reporting considerations for Form 1099-NEC – the same as for Form 1099-MISC
The PA Department of Revenue has required that filers of federal Form 1099-MISC provide copies of the forms to the Department of Revenue. In addition, beginning in 2018, PA required non-resident withholding on payments of non-employee compensation to non-resident recipients in excess of $5,000 annually. Although the PA DOR website has not yet addressed the effect of Form 1099-NEC on these requirements, per recent discussions with the leadership of the DOR the Department of Revenue will apply these rules to Form 1099-NEC.

W-9
To go along with the changes for the 2020 filings for non-employee compensation, now would also be a good time to make sure you have all your W-9s in order. You should request a Form W-9 from anyone you are required to file an information return for to IRS. In our case – you should have a W-9 for anyone you need to file a 1099-NEC and/or 1099-MISC for in 2020.

Often, mismatches occur which result in a notice from the IRS and requests for back up withholding. It is important to know how your recipient reports their information to the IRS to eliminate these types of errors. The W-9 will request the person’s name, business name, type of business, address, and TIN (either their SSN or EIN). If properly filled out, a person’s name should be listed first on the 1099 when given the person’s SSN, and a business name should be listed first if given an EIN.

Correct: Person’s name and SSN

Correct: Business name and EIN

John Smith
DBA John Smith Constructions
SSN: 123-45-6789

 

John Smith Construction
EIN: 12-3456789

 

It would NOT be correct to match the business name with a SSN for example.

John Smith Construction
SSN: 123-45-3789

 

This happens more often with individuals/sole proprietors/single member LLCs, as they report their business income on their personal return. It might be a good time to confirm with your vendors and avoid the headaches later.

Link to Form W-9 and instructions

For more information regarding the 1099-NEC and redesigned 1099-MISC forms, visit:

https://www.irs.gov/businesses/small-businesses-self-employed/forms-and-associated-taxes-for-independent-contractors

For more information, please contact the author at info@herbein.com. Article prepared by Jamie Van Lenten.