Preparing for the New Form 1099-NEC, Nonemployee Compensation

The IRS has reintroduced Form 1099-NEC to help clarify the separate filing deadlines on Form 1099-MISC. Companies that make payments to nonemployee service providers and vendors could face a challenging Form 1099 reporting season for 2020 because of this new form.

Background of Form 1099-MISC

Before the 2015 Protecting Americans from Tax Hikes Act (PATH Act), taxpayers could file one Form 1099-MISC with the IRS to report nonemployee compensation and miscellaneous income items by February 28 each year. The PATH Act changed the Form 1099-MISC due date to January 31 for reporting nonemployee compensation to the IRS. The due date to the recipient remained January 31.

Because of the due date change for filing the nonemployee compensation with the IRS, taxpayers had to separate nonemployee compensation using two Form 1099s. This created a lot of confusion for business owners and taxpayers, but it also caused the IRS to mistakenly treat any Form 1099 received after the January 31 deadline as late.

To alleviate the undue burden on separate filings, the IRS has resurrected Form 1099-NEC, last used in 1982, to separate nonemployee expenses and clear up the confusion.

Moving Forward with Form 1099-NEC

Beginning with the 2020 tax year, the IRS will require Form 1099-NEC to be used exclusively to report nonemployee compensation if the payments to the nonemployee totaled $600 or more. Businesses that historically reported payments in Box 7 of Form 1099-MISC will now use the new Form 1099-NEC. The good ol’ Form 1099-MISC is still around but will only be used to report miscellaneous income only, such as rent, royalties or certain payments to attorneys.

The deadline for filing Form 1099-NEC will remain on January 31. The deadline for filing other Forms 1099 & 1096 remains February 28, if filing by paper, and March 31, if filing electronically. The deadline for submitting either Form 1099-NEC or Form 1099-MISC to the recipient will remain on January 31.

If the filing deadline is missed, penalties are assessed as follows:

• $50 if you file within 30 days
• $100 if you file more than 30 days late, but before August 1
• $250 if you file on or after August 1

Defining Nonemployee Compensation

Nonemployee compensation is defined as payments to someone not on the payroll, on a contract basis to complete a project or work assignment.

A business is required to file a Form 1099-NEC if all four of the following conditions are satisfied:

1. Payment is made to someone who is not your employee,
2. Payment is made for services incurred during your trade or business,
3. Payment was made to an individual, partnership, estate, including certain payments to a corporation (i.e. attorney fees),
4. Payments made totaled at least $600 for the year.

Businesses must also file Form 1099-NEC for each person who was subject to backup withholding of federal income tax.

Examples of payments for which a Form 1099-NEC is required include:

• Professional service fees to attorneys for legal services, architects, contractors, etc.
• Payments for parts or materials used to perform services if incidental to such service
• Commissions paid to nonemployee sales personnel

Delivery Instructions for Form 1099-NEC

Like Form 1099-MISC, there are multiple copies of Form 1099-NEC you must distribute. Below is the instruction for each copy and its recipient below:

• Copy A: The IRS
• Copy 1: State tax department, if applicable
• Copy B: Independent contractor
• Copy 2: Independent contractor
• Copy C: Keep in your business records

Newly hired independent contractors must fill out Form W-9. Then, you can use their Form W-9 to fill out Form 1099-NEC. The new filing continues to include:

1. Payor’s information
2. Your Taxpayer Identification Number (TIN)
3. Recipient’s information
4. Total nonemployee compensation amount
5. Federal and state income tax withheld (if applicable)

Not only do employers have to keep the new 1099-NEC on their radars, but they also need to mark their calendars for a new nonemployee compensation due date. Beginning in 2021, send copies of Form 1099-NEC to workers you paid nonemployee compensation to during the year by January 31 or the next business day (if it falls on a weekend).

Your BMF Advisor stands ready to help you navigate your new filing requirements or any other tax planning needs.