The New 1099-NEC and 1099-MISC: What Every Organization Needs to Know

In the continually changing landscape of 2020, we can add a new form for 1099 Reporting.  All payments for Contract Labor previously reported in Box 7 of the 1099-MISC will now be reported on the new 1099-NEC.

The 1099-NEC is designed for contract labor or nonemployee compensation.  The amount that was paid during 2020 will be reported in box 1.  Boxes 2 and 3 are currently not for use and are on the form for future IRS purposes.

As a reminder, 1099s are issued by a business (non-profit, estate, or trust) when payments were made of $600 or more for rent, medical payments, contract labor, and payments to an attorney.  Also, 1099s are required for payments of $10 or more in the case of Royalties.

Payments made to an individual or partnership require a 1099, but payments to a Corporation generally do not require a 1099.  If payments were made to an LLC, the W-9 must indicate if the entity was taxed as an individual/single-person LLC, as a C corporation, S-corporation, or partnership to determine if a 1099 is required.   The W-9 is designed to protect the payor, and it is ultimately the contractor’s responsibility.  While there is no IRS guidance on how often a business should update the W-9 for each vendor, it is a good practice to have a policy in place that obtains new ones at least annually.  You can verify an EIN with the IRS e-services by going to https:/www.irs.gov/tax-professionals/taxpayer-identification-number-tin-matching.

So we know who gets a 1099-MISC, now we need to know about the changes in how the form is used.

Your payments to your attorney for services, the type of service, and contract terms, will determine if you use the 1099-MISC, the 1099-NEC, or both forms.  Under the previous use of the 1099-MISC,  ‘Gross Payments paid to an Attorney’ would have included all payments to an attorney in Box 14.  The new form reports these payments now in Box 10 on the 1099-MISC.  Take special note of the following change.  If the Attorney fees are for legal work and are treated as a contract labor payment, these are reported in Box 1 of the new 1099-NEC.  If the monies paid to attorneys were part of a legal settlement, they are reported in Box 10 of the 1099-MISC.

Here are a few helpful tips when preparing to file your 1099s.

Keep in mind that there are penalties for not reporting timely and/or not reporting at all.  The penalties begin at $50 per form and increase to $550 per form depending upon the timeliness and “intentionally disregarding” the filing rules.   In this way, the IRS encourages accurate and timely reporting.

Best of luck to you as you navigate the tax season ahead.

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