The IRS has confirmed an important change regarding non-employee compensation filing. For the 2020 tax year and going forward, businesses will be required to file non-employee compensation on form 1099-NEC, instead of form 1099-MISC.
Why has the IRS implemented this change?
The IRS has implemented this change based on findings of fraud related to non-employee compensation and withholding reporting. The original filing deadline of March 31st for the 1099-MISC created an opportunity for dishonest taxpayers to falsely report non-employee compensation and withholding and take advantage of a timing gap. If a taxpayer’s return was submitted and processed prior to March 31st, the IRS had no way to verify the taxpayers’ non-employee compensation and withholding claims.
Initially the IRS tried to combat the issue by creating two separate 1099-MISC filing deadlines based on the income type reported. However, this caused confusion amongst filers and also created new complications and unintended penalties, specifically for those who e-filed.
In lieu of this, the IRS has chosen to re-introduce the form 1099-NEC, a form used prior to the implementation of form 1099-MISC in the 1980s.
Will my business need to file form 1099-NEC?
A 1099-NEC must be filed for each non-employee (includes individuals, sole proprietors and LLCs) that your business paid $600 or more for services performed during the calendar year.
This includes payments made by cash, check, ACH or money sharing apps (ie. Venmo). Other commonly used terms for non-employees include independent contractors, independent consultants, freelancers, vendors, gig workers etc. Industries that commonly report non-employee compensation include recreation (gyms, fitness studios, etc.), construction and business services (legal and professional consultants).
If your business hired any of the non-employee types noted above, you will likely need to file the 1099-NEC for the 2020 tax year. It’s also important to note that the definition of what constitutes non-employee compensation has not changed. If your business previously reported an amount in box 7 on form 1099-MISC, you will now use form 1099-NEC to report that amount.
Will my business still need to file form 1099-MISC?
Traditional Form 1099-MISC income, such as royalties, rent and healthcare payments, must still be filed on the Form 1099-MISC. This may result in filing two separate forms per each non-employee when applicable, whereas previously it would have required only one.
What are the IRS filing deadlines?
1099-NEC: Due by January 31, 2021 (paper and electronic filings)
1099-MISC: Due by February 28, 2021 (paper) and March 31, 2021 (electronic)
What can your business do to prepare for the filing change?
The best thing you can do to prepare for the upcoming filings is to communicate and start a conversation with the party responsible for processing your filings (ie. in-house staff, accounting professional, third-party service provider). Topics for discussion that you may want to consider include:
-Reviewing IRS e-filing specifications and performing reporting system testing using prior year data to confirm your existing resources are capable of accommodating the reporting changes
-Possibility of the need to file separate state forms (state by state basis)
-Plan for obtaining up-to-date taxpayer information in a timely manner to avoid unnecessary penalties
Additionally, your business should plan to get ahead of payee questions by notifying recipients of the anticipated changes to the tax documents they will receive this year.
To start the conversation about your company’s non-employee compensation filing transition, schedule a time to reach out to us today.