The IRS is now bringing back Form 1099-NEC for the 2020 tax year for the purposes of reporting nonemployee compensation. This form has not been used since 1982. The purpose of the 1099-NEC is to alleviate some of the filing date and reporting confusion that was caused by the PATH (Protecting Americans from Tax Hikes) Act of 2015. Form 1099-MISC will still be used in 2020 to report other types of payments. Both forms are required only when making payments in the course of your trade or business. Personal payments are not reportable. Also, payments to corporations are generally not required to be reported.
1099-NEC
The 1099-NEC will be used to report any independent contractor payments of $600 or more over the course of the year.
- All compensation types are reported in Box 1
- Services performed by someone who is not your employee (including parts and materials).
- Payments to an attorney (see attorney fees section below).
- Box 4 is used to report any federal tax you withheld from the recipient.
- Filing deadline is February 1, 2021.
1099-MISC
Despite the 1099-NEC now being used, Form 1099-MISC is still relevant and will be required to report other types of payments. This form has 17 boxes for information reporting, but the most common are below.
- Box 1 – Rent (only if paid to the owner of the property, not to be given to a property management company).
- Box 2 – Royalties
- Box 3 – Other Income (prizes and other types of payments that are not classified as “compensation”).
- Box 6 – Medical and health care payments
- Box 10 – Gross proceeds paid to an attorney (see attorney fees section below).
- Filing deadline is March 31, 2021 if filing electronically.
Attorney Fees
Attorney fees are reported on either Form 1099-NEC or Form 1099-MISC depending on the situation.
-Payments to an attorney are reportable in Box 1 of Form 1099-NEC.
- For example, fees in connection to an attorney’s services would be reported on Form 1099-NEC.
-Gross proceeds paid to an attorney are reportable in Box 10 of Form 1099-MISC.
- For example, proceeds an attorney or law firm received from a settlement agreement would be reportable on Form 1099-MISC.
State Filing Requirements
It is important to note that the IRS will not be forwarding the 1099-NEC to the applicable states, unlike Form 1099-MISC. Form 1099-NEC will need to be electronically filed separately with the appropriate states.
- Maryland requires 1099-NEC filing if there were Maryland state taxes withheld.
- Virginia has not issued any guidance on 1099-NEC filing requirements.
- DC requires 1099-NEC filing and can be submitted electronically.
Accounting Systems
Most accounting systems have features that allow you to track vendor payments for 1099 purposes. For example, you can do this in QuickBooks Online:
- Click the Expenses tab in the side bar.
- Click the Vendor sub-tab and then click New Vendor.
- Check the box that says, “Track payments for 1099”.
Payers should request a Form W-9 from all vendors they work with. This will ensure that the vendor’s name, address, entity type, and taxpayer identification number is correct on the 1099 that is given to them. 1099 information can also be tracked using third party cloud-based applications such as Bill.com or through your payroll service provider.
Penalties for Late Filing
These forms must be filed on time in order to avoid late filing penalties. Small businesses with less than $5 million in gross receipts will incur penalties based on how late each form is.
- $50 per form if you file within 30 days.
- $110 per form if you file more than 30 days late but before August 1.
- $270 per form if you file on or after August 1.
- Failure to filing the forms will result in a $550 penalty per form.
The IRS has instructions for both forms on their site at https://www.irs.gov/forms-pubs/about-form-1099-nec .
For assistance with filing Forms 1099-NEC and 1099-MISC, please do not hesitate to get in touch with one of our team members.
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About Lori Kubic
Senior Manger & CPA
Lori Kubic is a Senior Manager at Ryan & Wetmore and leads the firm’s outsourced accounting services team. Since joining the firm in December of 2012, Lori has developed and supervised processes to effectively manage organizations’ accounting systems and records. Her work provides clients with detailed and actionable information on a timely basis.
About Will Clampitt
Staff Accountant
Will works in Ryan & Wetmore’s Frederick office. He works mostly with individuals and small to mid-size businesses on their tax issues. Will graduated from Hood College with a degree in Business Administration with concentrations in Accounting and Marketing