Beginning with 2020 information reporting, the IRS is reintroducing Form 1099-NEC, a form that was previously used until the early 80’s for reporting nonemployee compensation. The IRS hopes the form will help avoid fraudulent reporting, deadline confusion, and filing errors. In addition to new filing requirements, Form 1099-NEC has resulted in a redesigned Form 1099-MISC.
Payers Required to File Forms 1099-NEC and 1099-MISC
Information reporting is required for any business that makes a reportable payment in the course of its trade or business. Personal payments are not reportable. Reportable payments made by tax-exempt organizations and governmental units are also subject to these reporting requirements.
Reporting Nonemployee Compensation on Form 1099-NEC
For reporting nonemployee compensation paid in 2020 to the IRS and independent contractors, payers will use Form 1099-NEC. For payments made in years before 2020, nonemployee compensation was reported in Box 7 of Form 1099-MISC.
While it is beyond the scope of this article to list all the possible payments reportable on Form 1099-NEC, the form is generally used to report amounts paid as nonemployee compensation, such as fees, commissions, prizes, awards, or other forms of compensation for services rendered to the payer’s trade or business by someone who is not an employee. Form 1099-NEC, Box 1 is used to report such amounts that totaled $600 or more during the calendar year. Payments made to a corporation are generally exempt from reporting (but notably, payments for legal services to a corporation are not exempt). Form 1099-NEC, Box 4 is used to report any federal income tax withheld under the backup withholding rules.
Changes to Reporting on Form 1099-MISC
As a result of reintroducing Form 1099-NEC and its related reporting requirements, Form 1099-MISC has been redesigned. Some of the box numbers on Form 1099-MISC now correspond to different data. The 2020 Form 1099-MISC should be used to report payments that include:
- $10 or more of royalties;
- $600 or more of rents, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, or cash paid from a notional principal contract to an individual, partnership, or estate
- any fishing boat proceeds, and
- $600 or more of gross proceeds paid to an attorney.
One potentially confusing area of information reporting involves reporting amounts paid to attorneys. Such payments made in the course of a trade or business for legal services rendered to the business are reported on Form 1099-NEC as nonemployee compensation. The reporting gets more complicated when attorney fees are paid as part of a settlement award. Payments of $600 or more to an attorney that contain any amount of settlement proceeds are reported in Box 10 of Form 1099-MISC.
Deadline & State Filing Considerations
Regardless of paper or electronic filing, Federal Forms 1099-NEC must be filed on or before February 1, 2021. A request for an extension of time to file may be paper filed; however, there is no automatic extension.
Federal Form 1099-MISC must be filed by March 1, 2021 when paper filed, and it must be filed on or before March 31, 2021 when e-filed.
IRS Publication 1220 states that information reporting data for the new Form 1099-NEC will not be included in the Combined Federal/State Filing (CF/SF) program. This means the IRS will not be forwarding copies to state departments of revenue with their own filing requirements. Many states have already issued their own reporting requirements. Maine does not require Forms 1099-MISC or 1099-NEC to be filed with Maine Revenue Services.
ARB is dedicated to updating our clients and community as tax filing and reporting regulations evolve. Contact us if you have questions about this information. Please also visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by Dan Doiron, CPA
Dan has been in public accounting since his college internship with ARB in 1986. He has been a Principal since 1996 and works extensively with all types of clients to solve their compliance and tax planning issues. Dan was the May 1987 State of Maine Gold Medalist for earning the highest scores on all four parts of the CPA Examination. He is the Practice Leader of both ARB’s Business Tax Services Team and ARB’s Private Client Advisory Services Team.