Desiree King, CPA / Tax Manager at the RINA San Francisco office.
Desiree KingCPA / Tax Managerview bio

Form 1099 Changes Affect Non-Employee Compensation Reporting Requirements

The IRS has issued new rules for reporting compensation to non-employees

1/25/2021

The IRS has made significant changes regarding how non-employee compensation must be reported due to significant fraud that has occurred by individuals who have been submitting tax returns with sizable refund requests using forged Forms 1099-MISC.
 
These individuals were reporting small amounts of nonemployee compensation but large amounts of withholding. The tax returns would be submitted and processed prior to the March 31st IRS filing deadline for the Forms 1099, making it impossible for the IRS to match recipient statements with payer copies of the Forms 1099.
 
As a result, the IRS has created a new policy:

  • No refunds will be issued for claims based on the Earned Income Tax Credit until after February 15th
  • The 1099-MISC IRS reporting deadline for nonemployee compensation has been changed to January 31st

All organizations — including government agencies — that hire independent contractors should be aware of this change because it affects how compensation is reported.

IRS Reintroduces Form 1099-NEC

In the past, compensation of $600 or more paid to non-employees for services was reported on Form 1099-MISC.
 
But now, compensation of $600 or more paid to non-employees in 2020 and subsequent years is required to be reported on Form 1099-NEC.

The IRS has reintroduced Form 1099-NEC for all non-employee service compensation to replace box 7 on the traditional 1099-MISC form.
 
The new Form 1099-NEC applies only to payments made in the course of a trade or business to non-employees for services rendered. All other non-wage payments normally reported on Form 1099-MISC should continue.
 
According to instructions provided by the IRS, Form 1099-NEC must be used:
For each person in the course of your business to whom you have paid the following during the year:
At least $600 in:

  1. Services performed by someone who is not your employee (including parts and materials) (box 1);
  2. Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish (box 1); or
  3. Payments to an attorney (box 1). 

Form 1099-NEC must also be filed to report any payments from which any federal income tax was withheld under the backup withholding rules, regardless of the amount of the payment.
 
It should be noted that an attorney’s fee for services is reported on the 1099-NEC; however, fees paid to an attorney as part of a settlement agreement is considered miscellaneous income and must be reported on 1099-MISC.

Due Dates and Reminders

For reporting year 2020, this means that most of the vendors who were previously provided a Form 1099-MISC will now receive the new Form 1099-NEC.
 
Since January 31, 2021 falls on a Sunday both the recipient (i.e., vendor) and the IRS must receive Form 1099-NEC on or before February 1, 2021.
 
For our RINA clients, you should know that effective 2020, RINA converted from a corporation to a partnership. So, if you issue 1099’s, you may need to issue one to us for the tax year 2020 since we are now a partnership. 
 
It is important to note that the automatic 30-day extension has been eliminated with the revisions to the Forms 1099-MISC and 1099-NEC.
 
Sizeable penalties apply if the Form 1099-NEC or the recipient statements are not timely filed or are filed with incorrect information.

State Requirements

The IRS will not be sending copies of the new Form 1099-NEC, Nonemployee Compensation, to California or any other state.
 
As a result, businesses must send copies of Form 1099-NEC directly to states, even if a copy was filed with the IRS. This applies only to the Form 1099-NEC. The IRS will continue to send all other Forms 1099 to the states.

Consequently, if your reporting recipients live in states that require submission of Form 1099-NEC, businesses must submit a separate state filing required by each jurisdiction. 
 
Form 1096 is a separate filing form that must be completed for each of the 1099 form types filed. A Form 1096 must be filed along with copy A of Forms 1099-MISC and 1099-NEC.
 
Please reach out to your RINA professional, if you have any questions about your specific   reporting requirements – we are here to help.

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