It’s tax season again and there’s something you should know — the IRS requires your company to file Form 1099-NEC (Non-Employee Compensation) to report non-employee compensation to the IRS one month earlier than in previous years.
If your business paid an independent contractor more than $600 this year for services provided to your company in 2020, you’ll need to file a new Internal Revenue Service (IRS) tax form by Feb. 1, 2021.
Yes, this is a change, a bit complicated and urgent.
You’ll need to specify the amounts you’ve paid to each of these types of contractors you do not employ in your business. These include payments to:
- accountants, architects and engineers
- non-employee sales commissions
- oil and gas payments
- commissions paid to lottery ticket sales agents
- services from anyone who is not your employee
- cash payments for fish you buy from anyone in the business of catching fish and
- fishing boat proceeds.
You don’t have to file a 1099-NEC form for payments to limited liability corporations and for merchandise, telegrams, telephone, freight, storage and similar items.
For a deep dive into this year’s 1099 forms, check out our recent webinar below:
Form 1099-NEC vs. Form 1099-MISC: What’s the difference?
The 1099-NEC form replaces a section of Form 1099-MISC — Miscellaneous Income where these non-employee payments had been reported in previous years. Under the new IRS policy, these payments need to be posted on Form 1099-NEC.
Details about the new Form 1099-NEC
Form 1099-NEC replaces Box 7 on Form 1099-MISC. Here’s a breakdown of the new form’s key sections:
- report non-employee compensation in Box 1
- report federal tax withheld in Box 4
- record state tax withheld, state/payer’s state number and state income in Boxes 5, 6 and 7 respectively
There’s one nuance you need to know: how to pay lawyers. Payments for attorney services belong on Form 1099-NEC. By contrast, payments for legal settlement fees should be reported on the 1099-MISC form.
When you file this 1099-NEC form, send a copy to the IRS and to each independent contractor by Jan. 31.
Penalties for late filings
According to Moore Colson CPAs and Advisors: “Tax filers will have a $50 penalty applied for information returns filed after the deadline but within 30 days. The penalties increase to $110 for returns filed after 30 days beyond the deadline but before August 1, 2021. Companies that file after August 1, 2021 will get penalized $270 per form.”
You can try to file for an extension of 30 days to file Form 1099-NEC using Form 8809. Send a letter to the IRS with your tax ID number, address and reason for the delay. But there’s no guarantee your request will be approved.
What should you do to best prepare for Form 1099-NEC?
Pay independent contractors with credit cards
As you prepare this 1099-NEC form, remember that you only need to report payments made by checks, cash and direct deposits. Credit card, debit card, gift card and third-party payment providers such as PayPal are responsible for reporting credit card payments to the IRS on Form 1099-K.
So to avoid the hassle of filling out so many 1099-NEC forms, pay independent contractors with credit cards.
Collect W-9 forms from suppliers early
Ideally, you’ve already collected W-9 forms from your independent contractors before you started assigning them work.
When you do this, it’s crucial to record the contractor’s business name, tax identification number and social security number because it will be important to include when you file your Form 1099-NEC. You don’t want to be chasing down W-9s with an IRS deadline fast approaching.
Send 1099-NEC forms electronically
If you plan to file 250 or more 1099-NEC payments, the IRS requires you send them electronically and can penalize your business if you don’t. If you’re filing 250 or fewer, send by regular mail.
Why the change to 1099-NEC forms?
Under the previous IRS system, independent contractors had to file their annual compensations by Jan. 31. But here’s the catch: Companies didn’t have to report non-employment compensation until one month later.
So independent contractors could file their taxes before the IRS received the non-employee compensation amounts. As a result, the contractors’ total compensations for the year appeared lower than they actually were. So they paid lower taxes and received more IRS tax refunds.
By accelerating the due date, the IRS can more quickly figure out the total annual income of these contractors and tax them accordingly. The IRS recommends sending these forms in an e-file format. You can find instructions on both tax forms here.
What payments can you still record on Form 1099-MISC?
For other types of payments your company made in 2020, you can continue to report them on Form 1099-MISC. Those include:
- commercial rents
- medical and healthcare payments
- crop insurance proceeds
- prizes and awards and
- other income payments.
If you’re using a paper process, your 1099-MISC forms need to be sent to recipients by Feb. 1 and filed with the IRS by March 1 (March 31 if filing electronically).
Still have questions? Scroll back up on this page to watch our webinar reviewing the changes.