Following the introduction of new Form 1099-NEC, process changes are required for NEC and other Form 1099-MISC payments.
- New Form 1099-NEC is being added to the 1099 series of information returns. It will be used to report non-employee compensation (NEC).
- Part of the reasoning to introduce Form 1099-NEC was to alleviate confusion around the accelerated deadline of the Protecting Americans from Tax Hikes Act of 2015.
- The introduction of Form 1099-NEC may provide the opportunity to review whether income is being mapped correctly within the existing Form 1099-MISC framework.
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This year, tax information reporting sees the introduction of a new Form 1099-NEC into the 1099 series of information returns.
The new Form 1099-NEC will be used to report non-employee compensation (NEC) and is effective for payments made beginning January 1, 2020.
As with all changes, this will require an adjustment to our daily routines. These changes will involve not only mapping non-employee compensation payments to the new form but also adjusting income mappings to a modified version of the existing Form 1099-MISC, where non-employee compensation had previously been reported.
What is the new Form 1099-NEC?
The form is to be used to report non-employee compensation, including, for example, payments to independent contractors for services rendered.
Such vendor payments would generally have been reported on Form 1099-MISC Box 7. This means that Form 1099-MISC Box 7 payments should now be mapped to new Form 1099-NEC Box 1.
PATH-accelerated reporting deadline
Part of the rationale for the new Form 1099-NEC was that the Protecting Americans from Tax Hikes (PATH) Act of 2015 accelerated the deadline for reporting non-employee compensation from the usual Form 1099-MISC deadline of February 28, following the payment year for paper returns (and March 31 for electronic filing) to January 31.
These date changes resulted in deadline confusion and potential late-filing penalties as the same Form 1099-MISC could have a January 31 and/or February 28 or March 31 deadline depending on the type of reportable income payments. That’s why the new Form 1099-NEC was introduced (or re-introduced): To alleviate any confusion over the differing deadlines
As January 31, 2021 falls on a Sunday, the first deadline for Form 1099-NEC for 2020 payments will be February 1, 2021.
The new version of Form 1099-MISC, which will no longer include non-employee compensation, would follow the February 28 (March 1 for 2021 since February 28 also falls on a Sunday) or March 31 filing deadline for paper and electronic returns, respectively.
Note that these 1099-MISC deadlines refer to IRS return filing deadlines and that statements to recipients — the actual payees — must be filed earlier.
Changes create review opportunities
However, looking to the future might also require a bit of introspection.
In updating processes to address new Form 1099-NEC, it may also be an opportune moment to review whether income is being mapped correctly within the existing Form 1099-MISC framework. For example, some firms may be reporting all payments to attorneys on Form 1099-MISC Box 14 (Gross Proceeds Paid to an Attorney).
However, Box 14 is generally not used if an attorney is simply paid a fee by a payor for services rendered for the payor. Instead, such payments should generally have been treated as non-employee compensation reported on Form 1099-MISC Box 7. Box 14 might apply to a settlement payment, for example, that is being routed to the attorney in question.
Another example might be swap payments that are mapped to Box 7 instead of Box 3 (Other Income). In either case, such mapping errors could mean not only a wrong form type in next year’s reporting but an erroneous due date.
Beyond erroneous mappings, Form 1099-NEC also impacts payment reporting on the Form 1099-MISC for other payment types outside of non-employee compensation.
This is because certain boxes on Form 1099-MISC have changed due to the removal of non-employee compensation from Box 7 of the current form. In particular, Box 7 now contains the checkbox for $5,000 or more of direct sales.
Finding the correct reporting box
Other changes to the Form 1099-MISC include the following:
For brokers that use Form 1099-MISC for substitute payments (Box 8), swap income (Box 3) or royalties (Box 2), these boxes have not changed.
Monitoring state-level measures
Finally, filers of Form 1099-NEC need to monitor how states are handling this change in federal tax forms, including whether states would adopt new forms or procedures to accommodate the 1099-NEC federal reporting.
On this front, discussions among practitioners earlier this year indicated that Form 1099-NEC may not be included as part of the FIRE Combined Federal and State Filing Program. Therefore, understanding state-level requirements for 2020 NEC payments will be especially important.
The new Form 1099-NEC is not a major change; one income payment type is moved from one form to another. But nonetheless, payors will need to think through the various process shifts that may be required to accommodate the new entrant into the 1099 reporting world.