Please note that this blog is based on laws effective in September 2020 and may not contain later amendments. Please contact Cray Kaiser for the most recent information.
The Internal Revenue Service (IRS) has resurrected a form that has not been used since the early 1980s, Form 1099-NEC (non-employee compensation). This form will be used to report non-employee compensation in place of Form 1099-MISC, which has been used since 1983 to report payments to contract workers and freelancers. Form 1099-MISC has also been used to report rents, royalties, crop insurance proceeds and several other types of income unrelated to independent contractors.
Why the switch to 1099-NEC?
The revival of the 1099-NEC was mandated by Congress with the passage of the PATH Act back in 2015. However, there have been some complications with implementing the form, so its use has been delayed. It will now officially make its return in 2021 for payments made in 2020.
The reason for the change is to control fraudulent credit claims, primarily for the earned income tax credit (EITC), which is based on earned income from working. Scammers were filing tax returns before the normal February 28 due date for 1099-MISC, which does not give the IRS time to cross-check the earned income claimed in the returns. As a stopgap measure, 1099-MISC filings that included non-employee compensation were required to be filed by January 31, the same due date as W-2s, another source of earned income. By using the 1099-NEC for non-employee compensation, the IRS will be able to eliminate the problems created by having two filing dates for the 1099-MISC.
What will be included on Form 1099-NEC?
Luckily, the 1099-NEC is quite simple to use since it only deals with non-employee compensation (which is entered in Box 1). There are also entries for federal and state income tax withholding.
Who receives Form 1099-NEC and when is it due?
If you operate a business and engage the services of an individual other than one who meets the definition of an employee (i.e. an independent contractor), and you pay him or her $600 or more for the calendar year, you are required to issue the individual a Form 1099-NEC soon after the end of the year. This will help you avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit.
The due date for filing Form 1099-NEC with the IRS AND mailing the recipient a copy of the 1099-NEC that reports 2020 payments is February 1, 2021. Please note that the due date is usually January 31, but because that date falls on a weekend in 2021, the due date becomes the next business day, February 1, 2021.
Where does Form W-9 come into play?
It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file a 1099 for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having W-9s completed, it would be a good idea to establish a procedure for collecting W-9s in the future.
As a reminder: IRS Form W-9 is provided by the government as a means for you to obtain the vendors’ data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law in case a vendor gave you incorrect information. The W-9 is for your use only and is not submitted to the IRS.
Are there penalties for not filing Form 1099-NEC?
The penalties for failure to file the required informational returns are $280 per informational return. The penalty is reduced to $50 if a correct but late information return is filed no later than 30 days after the required filing date of February 1, 2021. It may also be reduced to $110 for returns filed after 30 days but no later than August 1, 2021. And please note, if you are required to file 250 or more information returns, you must file them electronically.
Cray Kaiser can help you prepare your 1099s for submission to the IRS. If you’d like assistance, please contact us today at 630-953-4900. We’d be glad to help you!