By Scott Lewis, CPA, MSA
2020 is finally over! Say hello to a hopefully less hectic and a smoother 2021. Before 2020 is completely gone from our rearview mirrors, let us start this year and ensure that all compliance forms are timely filed, some with a NEW EARLIER date of February 1, 2021. We wanted to bring to your attention a new IRS form and the filing requirements which unfortunately are sure to cause some uncertainty.
The IRS has created a new form 1099-NEC, Nonemployee Compensation. The Protecting Americans From Tax Hikes Act (PATH) Act, passed in 2015, accelerated the due date to file Form 1099-MISC from February 28 to January 31 for certain information returns to combat identity theft and refund fraud. To avoid any additional burden and confusion, which of course has never occurred from IRS filings and rulings, the IRS created this new Form 1099-NEC.
The 1099-NEC was created for nonemployee compensation over $600 and there is generally no automatic 30 day extension to file. The 1099-NEC must be filed to all recipients by February 1, 2021 (as January 31 is a Sunday). The IRS also requires that these be filed by February 1, 2021, along with the Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Please note this filing/reporting date to the IRS has been accelerated compared to other 1099 forms, which are due later in the year. If the use of the 1099-NEC is needed, the 1096 summary form would have only this one box checked and again, due on February 1, 2021. Any additional 1099’s such as 1099-MISC will go under a separate filing. Also, ensure that any state reporting is adhered to.
So, what does need to be reported on these new forms? The new form is needed for all independent contractors, gig workers, or self-employed individuals whose payments were over $600, basically everything that was previously recorded in box 7 of the 1099-MISC Miscellaneous Income form. The payments are not for physical products, but include:
Services performed by someone who is not an employee (which does include their parts and materials). The example in the Form 1099 Instructions states “Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service. For example, report the total insurance company payments to an auto repair shop under a repair contract showing an amount for labor and another amount for parts, if furnishing parts was incidental to repairing the auto”. The assumption would be that the auto repair shop would be reporting the all-inclusive gross sales and report their parts as cost of sales. The IRS is trying to track all reportable revenue at the payee level.
Payments to attorneys for legal services in the normal course of trade of business. An exception to filing on 1099-NEC is for gross proceeds paid to attorneys, generally for settlement payments, in the case of legal disputes. These would continue to be reported on Form 1099-MISC. And regardless of the legal classification of the attorney (Corporation, partnership, etc.) all of the above payments must be reported.
Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish, as we believe that this applies to all readers of this article.
The other Form 1099s except for the above, have not really changed. Filings for 1099s on rents, interest income and others must be sent to all recipients by February 1, 2021. The filing deadline of these forms along with Form 1096, Annual Summary and Transmittal of U.S. Information Returns to the IRS is March 1, 2021 (or March 31, 2021 if filing electronically), and all state filings as applicable on their respective dates.
And always, get the payee to fill out a Form W-9 Request for Taxpayer Identification Number and Certification before any payments occur. This form includes their name and address, what type of legal entity they are (individual/single member LLC, C or S corporation, partnership or LLC, and trust). More importantly, it includes their Employee Identification Number (EIN) or social security number (if an individual).
Payments for which a Form 1099-MISC or Form 1099-NEC would not be required include payments to C and S corporations (including limited liability companies (LLC) treated as a C or S corporation) with limited exception. The main one for purposes of this article being the payments to attorneys as noted above. When in doubt, file a 1099 anyway. There are no penalties for filing, but the penalties can be quite severe for not filing.