Changes are in store this tax season for companies that report information in Box 7 of Form 1099-MISC. For 2020, these amounts will be entered on the new Form 1099-NEC.
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, since 2015, the due date for reporting amounts in Box 7 was accelerated to January 31, while the deadline for reporting most other information on Form 1099-MISC remained at February 28, if filing on paper, and March 31, if filing electronically.
To alleviate the problems caused by conflicting due dates, 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 of January 31 whether filing paper or electronically.
Who Must File?
Any business should file the new form for each person whom they have paid at least $600 for:
- 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 (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 February 28 to January 31, the IRS also eliminated the automatic 30-day extension.
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.
What is still reported on 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.
- 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. For those who made use of the IRS 1099 Combined Federal/State electronic filing program, the 1099-NEC information will not be shared with the states.
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. Businesses need to be sure to file separately to the states based on their respective due dates and requirements.
Should you have any questions about the new 1099-NEC or require our assistance, please contact your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford), or email us at firstname.lastname@example.org.