Form 1099-MISC VS. The New Form 1099-NEC

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Blog by Stephen P. Gunby & Associates, P.C.

2020 has been a year of change and the IRS has some changes for 1099-MISC filers who report nonemployee compensation in Box 7 of Form 1099-MISC. The arrival for the New Form 1099-NEC to report nonemployee compensation!

Starting tax year 2020, any business, regardless of size, that pays at least $600 for services performed in the course of their trade or business by a person, who is acting as an independent contractor, are required to file Form 1099-NEC.

Why the Change?

Prior to tax year 2020, nonemployee compensation was reported in Box 7 on Form 1099-MISC. The due date for reporting amounts in Box 7 was to Jan. 31, while the deadline for reporting most other information on Form 1099-MISC was at Feb. 28..

For 2020, the IRS has separated Form 1099 MISC into two separate forms.. Form 1099-NEC is a new form used only to report non-employee compensation. Form 1099-NEC must be filed on or before Feb. 1, 2021. Form 1099 MISC will remain to report all other income originally on the form.

In recent years, the IRS discovered that significant fraud was occurring from individuals submitting tax returns with sizable refund requests using falsified 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 31 IRS filing deadline for the Forms 1099, making it impossible for the IRS to match recipient statements with payer copies of the Forms 1099. 

To avoid this, the IRS created a new policy. It no longer issued refund claims based on the Earned Income Tax Credit until after February 15, and it advanced the 1099-MISC IRS reporting deadline for nonemployee compensation to January 31. 


Who Must File?

As previously stated, the new Form 1099-NEC impacts many businesses. More specifically, the IRS indicates that businesses should file the new form for each person whom they have paid at least $600 in:

  • Services performed by someone who is not their employee (including parts and materials) (box 1);
  • Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish (box 1); or
  • Payments to an attorney for non-litigation settlement fees. (box 1).

Businesses must also file Form 1099-NEC for each person from whom they have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

It is important to file on time, with the correct information, to avoid penalties. The amount of the penalty, which can be as high as $280 per information return, is based on when the filer submits a correct information return. If the failure to file a correct information return is due to intentional disregard, the penalty is at least $560 for each form filed late with no maximum penalty.

In addition to accelerating the due date for filing Form 1099 that includes nonemployee compensation (NEC) from Feb. 28 to Jan. 31, the IRS also eliminated the automatic 30-day extension.

What do I use Form 1099-MISC for?

File Form 1099-MISC for each person to whom you have paid during the year:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
  • At least $600 in:

    • Rents.

    • Prizes and awards.

    • Other income payments.

    • Medical and health care payments.

    • Crop insurance proceeds, fishing boat proceeds or sale of aquatic life

    • Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.

    • Payments to an attorney for litigation related settlement fees.

In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

Form 1099-MISC must be filed by March 1, 2021.

Turn to the Experts

To help ensure compliance, navigate the change and avoid late fees and penalties, turn to Stephen P Gunby and Associates for all your tax filing needs. Our knowledgeable staff is happy to handle all your 1099 compliance needs.