If you have a business with independent contractors, it is important to be aware of a recent reporting change that the IRS has implemented. Starting with the 2020 tax year, businesses must report nonemployee compensation (NEC) on Form 1099-NEC instead of Form 1099-MISC.
You may be surprised to learn that this is not a new form, but it hasn’t been used by IRS since 1982. It was brought back for the 2020 tax year with the goal of minimizing deadline confusion. The 1099-MISC is used to report other payments, and in some cases, there is a different filing deadline for reporting these payments. The 1099-NEC has one single filing deadline of January 31st.
If you pay a nonemployee $600 or more for services provided in your business during the year, you must report that on Form 1099-NEC and provide a copy to the recipient so it can be reported on his or her individual tax return. The tax treatment for recipients is the same as if they received a 1099-MISC.
What does this all mean for the 1099-MISC? The form has not gone away, but it will no longer be used to report nonemployee compensation. It is still applicable for reporting various other types of payments, including royalties, rents, prizes and awards, medical and health care payments, gross proceeds to attorneys from lawsuits, and other items.
A penalty can be assessed if you fail to provide a 1099-NEC to a qualifying recipient. There is also a penalty if you use the wrong form, e.g., 1099-MISC when a 1099-NEC should have been filed. If the wrong form is filed, you can void it as soon as possible by filing an amended statement showing $0 for nonemployee compensation on the 1099-MISC, and then filing the 1099-NEC. The longer it takes to correct it, the higher the IRS penalty could be.
Another possible impact of this change is that businesses may need to file the 1099-NEC separately with the state as well as IRS, where in the past they might not have needed to. This is because 1099-MISC forms were provided to certain states automatically as part of the IRS Combined Federal/State Filing Program, so businesses in those states did not need to file anything else once they filed with IRS. The 1099-NEC is not part of this combined program, so if a state requires a copy it must be filed separately. Several states have released specific guidance about this, so it is important for businesses to double check with their state tax or revenue authority where the business is established, where the contractor resides, and/or where the services are being performed.
If you need help complying with the new 1099-NEC guidelines, feel free to reach out to us any time.