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.
1099-NEC: A New Form for Independent Contractor Reporting
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.
1099-MISC: Same Form New Way of Using
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.
1099-MISC Use Changes
So we know who gets a 1099-MISC, now we need to know about the changes in how the form is used.
- Boxes 1-6 remain the same as in previous years.
- Boxes 7-14 have shifted the location of items that would have been previously reported.
- Box 14 is now for reporting Nonqualified Deferred Compensation, which was not on the old 1099-MISC.
- Box 10 reports Attorney Fees paid as part of a legal settlement.
Attorney Fees on 1099-MISC and 1099-NEC
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.
Reminders and Tips for Preparing 1099s
Here are a few helpful tips when preparing to file your 1099s.
- Make sure there is a current W-9 on file for each vendor before remitting payment. Trying to pull together that information at tax reporting time can be very difficult if you are no longer using a particular vendor.
- Payments for Supplies do not require a 1099
- Payments made on a debit or credit card do not require a 1099.
- The 1099-NEC will be due to both the contractor and the IRS by January 31st.
- January 31st is the deadline for vendors to receive the Form 1099-MISC
- The IRS must receive the 1099 filing by the end of February if filing on paper or the end of March if e-filing.
- The threshold number for electronic filing of 1099s remains at 250 forms; this is subject to change.
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.