Starting with the January 31, 2021 filing deadline, the IRS has separated 1099 reporting requirements for Non-Employee Compensation onto its own form, the 1099-NEC. In past years, non-employee compensation had been reported in Box 7 of the 1099-Misc, Miscellaneous Income. The new change will require many 1099 filers to prepare both 1099-NEC and 1099-MISC forms for their qualifying payments to outside entities.
Why the Change?
The 1099-NEC, which was last seen the same year E.T. and Rocky III hit theaters, is being revived by the IRS as a solution to a section of The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that moved the filing deadline for Form 1099-Miscs that included non-employee compensation. Prior to the 2015 PATH Act, Form 1099-Miscs that included non-employee compensation had to be provided to recipients by January 31, 2020, but did not have to be filed with the IRS until February 28th (if filed by paper), or March 31st (if filed electronically). The PATH Act made it so Form 1099-Miscs that included Nonemployee Compensation would have to be filed with the IRS on January 31st, regardless of whether they are being filed by paper or electronically, however, 1099-Miscs that did not include Nonemployee compensation retained their February 28th (paper) or March 31st (electronic) filing dates. The 1099-NEC aims to eliminate some of the confusion caused by multiple filing deadlines for the Form 1099-Misc, based on what was being reported, by separating out the Non-employee compensation onto its own form.
Form 1099-NEC
Non-employee compensation is one of, if not the most, frequently reported payment type for Form 1099 purposes, as it covers payments to independent contractors, companies, and freelancers in the course of business. The 1099-NEC will exclusively cover non-employee compensation payments, which include any compensation for services paid to someone or some company who is not an employee. The IRS provides four conditions to be met to determine whether a payment is reportable on a 1099-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
Non-employee compensation is reportable in Box 1 of Form 1099-NEC. Examples of payments that would qualify include those made for professional services, such as accounting and legal fees, contractor labor, referral fees, and purchases of fish for cash (I’m sure that last one is especially relevant for many businesses). The remainder of the form offers boxes to report Federal Backup withholding, which is only necessary if you have not received a TIN from the payee, and State information. In general, any payments that were reported using Box 7: Non-Employee Compensation on prior-year Form 1099-Miscs will move directly to the new Form 1099-NEC.
Form 1099-Misc
Prior to the introduction of the 1099-NEC for 2020, the Form 1099-MISC was almost all-encompassing, with boxes for Rent payments, royalties, prizes and award, medical payments, and non-employee compensation, among other items. Other than having non-employee compensation removed from the 1099-MISC, not much has changed with the new form apart from some changes to the numbering in the boxes. Boxes 1-6 are unchanged on the New Form 1099-MISC, which include commonly reported payments such as Rent in Box 1 and Royalties in Box 2. Box 7 on the 2020 1099-MISC is now the “Payer made direct sales of $5,000 or more of consumer products to a buyer for resale” checkbox that was formerly in Box 9, Crop insurance proceeds moved from Box 10 to Box 9, Gross proceeds paid to an attorney (for settlements) is now Box 10 instead of Box 14, Section 409A deferrals has been changed from Box 15A to Box 12, and Nonqualified deferred compensation has been added to Box 14.
Inform your Non-Employee Compensation Recipients of the Change!
With a new form, there is bound to be some confusion from some individuals or smaller contractors that have received a 1099-MISC in the past, and will be receiving a 1099-NEC for 2020. Many individuals may not be aware of the change, so to avoid any issues or concern from contractors, it can be helpful to inform them prior to sending out 1099s that they will be receiving a 1099-NEC in place of a Form 1099-MISC for 2020.
If you would like additional clarification on either the 2020 Form 1099-NEC or 1099-MISC, or are interested in 1099 preparation and filing services for your company, please do not hesitate to contact anyone hear at Stephano Slack LLC.
Anthony Fortescue
afortescue@stephanoslack.com