The IRS is about to change the Form 1099-MISC instructions and add a new 1099-NEC form for reporting. Here's what your accounting department should know.
Businesses currently use Form 1099-MISC to report compensation paid to independent contractors as well as a few other types of payments. However, recent changes to the Form 1099-MISC instructions and deadlines have complicated the process.
To address this problem, the IRS will transition part of the reporting to a new 1099-NEC form, starting with tax year 2020. Here's a breakdown of what to expect from the new Form 1099-NEC and the transition process.
Current Form 1099-MISC Instructions
Form 1099-MISC (miscellaneous) reports several types of payments made by businesses. This primarily covers non-employee compensation to independent contractors, which is reported in Box 7 of the form.
The 1099-MISC form can also report other payments like royalties, excess golden parachute payments, gross proceeds paid to an attorney and when direct sales of $5,000 or more of consumer products are sold to a buyer for resale anywhere other than a permanent retail establishment.
Prior to 2019, the Form 1099-MISC deadline was Feb. 28 if it was submitted by mail and March 31 if it was filed electronically. However, the Tax Cuts and Jobs Act of 2017 changed the deadlines, which led to complications.
Complications with the TCJA
To help prevent tax fraud due to identity theft, the TCJA moved the Form 1099-MISC deadline for reporting nonemployee compensation earlier, to Jan. 31. Since the IRS gets this information sooner, there is less time for a criminal to use stolen or false identity or income information to file a fraudulent tax return as an independent contractor.
The problem, though, is that the new deadline only applies when Form 1099-MISC includes Box 7 income. If a 1099-MISC form does not include nonemployee income, the deadline remains Feb. 28 for paper filings and March 31 for electronic filings.
"This creates a potentially confusing scenario where business owners have two different deadlines for the exact same tax form," says Ellen Feeney, VP, Counsel at ADP. "It increases the chance they mix up the dates and accidentally run into the 1099 late filing penalty."
Planned Changes with the 1099-NEC
To solve this issue, the IRS announced that they would start using an additional Form 1099-NEC, beginning with the tax year 2020. This approach splits the current 1099-MISC form into two parts. Form 1099-NEC will be used to report nonemployee compensation. The revised Form 1099-MISC will continue to report the other types of 1099-MISC reportable payments besides nonemployee compensation.
A business will need to send out a Form 1099-NEC at year-end if they meet the following four conditions:
- The payor made the payment to someone who is not the payor's employee.
- The payor made the payment for services in the course of the payor's trade or business (including government agencies and nonprofit organizations).
- The payor made the payment to an individual, partnership, estate or, in some cases, a corporation.
- The payor made payments to the payee of at least $600 during the year.
"These are the same conditions for sending out a 1099-MISC in 2019 to report nonemployee compensation," says Feeney. "The only difference is it will now be through a new form."
The business will also need to list the recipient's address, Tax Identification Number, federal and state income tax withheld (if any) and other state information, such as state employer identification numbers. Businesses would already have entered this information on a Form 1099-MISC for the tax year 2019.
Impact on Reporting and Compliance
The new system will first apply to the tax year 2020, so the forms will be due in 2021. The Form 1099-NEC deadline is officially set for Jan. 31. However, since Jan. 31 falls on a Sunday in 2021, the actual deadline will be Feb. 1, 2021.
The Form 1099-MISC deadline will now only be on Feb. 28 for filing by paper and March 31 for filing electronically. There will no longer be a January Form 1099-MISC deadline. This new system will primarily affect businesses that hire independent contractors since they will now use Form 1099-NEC instead of the 1099-MISC.
"Most businesses will move over to only using the Form 1099-NEC to report nonemployee compensation," says Feeney. "But depending on the type of miscellaneous payments sent out, a business may need to file both forms or just the 1099-MISC form."
Business owners should review their latest 1099-MISC forms to see what payments they are currently reporting. They'll switch to reporting any nonemployee income through Form 1099-NEC and keep everything else on Form 1099-MISC.
While the IRS has released draft versions of the new forms and their instructions, they have still not quite finalized everything. ADP will update readers when the official version comes out. For now, business owners should start planning for the switch to this new reporting system in a year.