Did you know that 1099 reporting will be very different this year? As we enter the 2020 tax year, businesses will report nonemployee compensation on a new Form 1099-NEC instead of Form 1099-Misc. The IRS now requires the new form if companies pay more than $600 to a nonemployee, such as an independent contractor.
1099-MISC and 1099-NEC
In an effort to simplify reporting, nonemployee compensation was previously reported along with other payments on Form 1099-Misc. However, scammers discovered that they could claim bogus tax refunds by using forged 1099s. So in 2015, Congress enacted the Path Act, which included provisions intended to reduce fraud. For example, filing dates for 1099s were escalated, creating penalties for filing NEC-related 1099s after January 31.
This process of reporting has now changed with the introduction of Form 1099-NEC.
Why did the IRS Reintroduce 1099-NEC?
With the escalation of these filing dates, there started to be reoccurring confusion between legitimate filers. The Path Act created separate filing dates for Form 1099-MISC, where NEC was previously reported. With the new Form 1099-NEC, there is only a single filing deadline to help ease uncertainties.
What is Nonemployee Compensation?
Nonemployee compensation can include items such as:
- Prizes and awards given to nonemployees
- Other compensation for services provided by nonemployees
- Compensation to individuals, partnerships, estates, contractors, and some corporations
- Payments to attorneys, accountants, architects, etc.
Characteristics of the 2020 1099-NEC
The new 2020 1099-NEC has a few new characteristics that differ from those of the old 1099-Misc. First, there is now only one amount in the reporting box, plus federal withholding and state boxes. The filer will be pleased to notice that the new form is much simpler to understand and digest than the old 1099-Misc
How did Form 1099-MISC change?
In terms of overall changes, the 1099-NEC does not look much different than the previous form. The primary difference was that the transition of the former box seven to the 1099-NEC. Be sure to check out the IRS’ instructions for properly filing these two forms.
Does This Change the Employee vs. Independent Contractor Discussion?
No. In-fact, the update did not include any significant reporting rules other than the form type. However, this is a good time to evaluate if you can, and if you should, hire independent contractors. If your organization employs any nonemployees, be sure to do a full assessment to ensure that you are properly classifying all of the members of your workforce. It’s crucial to be aware that the new 1099-NEC may very well give the IRS better data about possible worker misclassifications.
Although the process can appear to be straightforward, new forms can often confuse taxpayers. If you have questions or need assistance filing your 1099 forms for the 2020 tax year, be sure to contact a CRI professional.