You’ve got some tax obligations at the beginning of 2020, and the IRS has made it easier to fulfill them.
No, that’s not the opening line of a tax joke. It’s a heads-up that a new form is available for the tax year 2020—1099-NEC, Nonemployee Compensation. The form is a requirement for any company that provides compensation to nonemployees.
The Resurrection of 1099-NEC to Sort Out Deadlines
1099-NEC is actually an old form withdrawn by the IRS in 1982. After that year, companies have used 1099-MISC to report nonemployee compensation as well as miscellaneous income items, with the form due by February 28 in the year following the applicable tax year. When a due date does not fall on a business day, it is moved to the next business day.
Then Congress passed the 2015 Protecting Americans from Tax Hikes (PATH) Act. This legislation moved the due date for reporting nonemployee compensation to January 31. The change required companies to file two 1099-MISCs—one for nonemployee compensation, due on January 31, and one for miscellaneous income items, due February 28.
The deadline change not only caused confusion among filing companies but led to the IRS mistakenly tagging 1099-MISCs as late if filed after January 31. To clear things up, the IRS resurrected 1099-NEC, which covers only nonemployee compensation and is due January 31. Form 1099-MISC retains its February 28 due date.
You no longer use Box 7 on 1099-MISC for reporting nonemployee compensation. That moves to the 1099-NEC. Box 7 on the 1099-MISC is now when “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale.” Use the 1099-NEC to report nonemployee compensation previously in box 7 of the 1099-MISC for independent contractor compensation for services and fees, commissions, prizes, and awards.
Who Should Use 1099-NEC?
A GovCon should use 1099-NEC under the following conditions:
- You paid someone who is not your employee. This might include an accountant, PR firm, nonemployees who receive sales commissions, and workers classified as independent contractors.
- There are special rules for attorneys. Payments to attorneys for specific litigation matters are still reported on box 10 of the 1099-MISC. This may be for settlement payments, but not for the attorney’s services. Attorney services for general business matters, such as reviewing contracts and employment matters, are reported on the 1099-NEC. These are payments for services in the ordinary course of your trade or business. You may use both 1099s forms to report different payment types to attorneys.
- You made the payment to an individual, partnership, estate, or corporation. Note that this is not required for a C corporation or an S corporation unless they are for attorney fees.
- The payment made to the payee was a least $600 for the year.
You must also file a 1099-NEC for anyone from whom you withheld federal income tax under backup withholding rules. That includes amounts less than $600.
Your firm bears the responsibility for filing 1099-NECs with the IRS and sending a copy to the contractor(s).
1099-NEC has five main sections: payer’s information; recipient’s information (both of these sections cover name, address, and taxpayer ID); nonemployee compensation amount; federal income tax withheld; and state information.
See the IRS website for detailed instructions on both 1099-NEC and 1099-MISC.
It’s never too early to prepare for a smooth, organized tax season. Reach out to take advantage of CAVU financial advisors’ broad, deep experience in the tax issues confronting your GovCon firm.