Addressing the Changes to the 1099 Forms
Calling All Business Owners Who Use Contractors
Mainly, when changes to the tax code are made, tax professionals like your accountant tackle the implications. But when it comes to filing your 2020 taxes in 2021 business owners need to be in the know about the changes to the 1099 forms which they will use to report payments such as those made to independent contractors and freelancers.
The biggest change is the reintroduction of a form from year’s past called Form 1099-NEC (or non-employee compensation). Let’s review the changes you can expect when filing your business taxes in 2021, starting with the purpose of 1099 forms.
What Is the Purpose of 1099 Forms?
1099 forms are intended to help U.S. taxpayers report all of their income so that the IRS can collect the appropriate amount of taxes. The Form 1099 is considered an informational return. As such, an informational return helps the IRS to compare the information reported on 1099 forms against the income that taxpayers have reported.
Changes to the Process of Filing 1099 Forms
Now that we’re clear on the purpose of 1099 forms, let’s outline the changes to the process that are now in effect for filing 2020’s taxes.
The PATH Act which, among other things, updated the timeline for receipt of tax refunds necessitated the development of a new form called the 1099-NEC that will make it easier for filers to manage filing 1099s by their updated due date of February 1st. Recent additional regulations outlined by the Treasury that eliminated 30-day extension policies affecting 1099s also necessitated this update in the process.
The Form 1099-NEC will replace the nonemployee compensation section of the 1099-MISC (miscellaneous income) form which includes payments made to freelancers, independent contractors, gig workers and other non employee team members.
Should I File a Form 1099-NEC?
There are a couple of specifications that will help you determine if you will need to file a 1099-NEC and they are as follows:
- Have you paid at least $600 in services performed by someone who is not your employee (including parts and materials) (box 1)?
- Have you made cash payments for fish (or other aquatic life) that you purchased from anyone engaged in the trade (box 1)?
- Have you made payments for the receipt of legal services to an attorney, a law firm, or other providers of legal services totaling $600 or more (box 1)?
- Have you withheld any federal income tax under the backup withholding rules regardless of the amount of the payment (box 4)?
If you answered yes to any of the above questions, then you will need to use the form 1099-NEC to report nonemployee compensation and will need to file this form by February 1, 2021. More information on this process, as outlined by the IRS, can be found here.
Even though there’s a new form at play, the Form 1099-MISC will still be sticking around to manage the reporting of rent payments, prizes & awards, gross proceeds to an attorney, Section 409A deferrals, and nonqualified deferred compensation income. However, the 1099-MISC form has been revised in the wake of the development of the new NEC form to include updated box numbers.
The Form 1099-MISC’s boxes will now be listed as follows:
- Rents Box
- Royalties Box
- Other Income Box
- Federal Income Tax Withheld Box
- Fishing Boat Proceeds Box
- Medical and Healthcare Payments Box
- Payer Made Direct Sales of $5,000 or More Box
- Substitute Payments in Lieu of Dividends or Interest Box
- Crop Insurance Proceeds Box
- Gross Proceeds Paid to an Attorney Box
- Section 409A Deferrals Box
- Excess Golden Parachute Payments Box
- Nonqualified Deferred Compensation Boxes 15–17
Should You File a Form 1099-MISC?
Since clarity is kind and we’ve talked about a lot of changes already, let’s also look at how to determine if you need to file a 1099-MISC form in 2021.
- Have you paid $10 in royalties or broker payments in lieu of dividends or tax-exempt interest?
- Have you paid at least $600 in:
- Prizes and awards,
- Other income payments,
- Medical and health care payments,
- Crop insurance proceeds,
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade,
- Cash paid from a notional principal contract to an individual, partnership, or estate,
- Gross proceeds payments to an attorney for a settlement agreement (i.e. not for legal services), and
- Any fishing boat proceeds?
- Have you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment?
If you answered yes to any of the above questions, then you should prepare to file a Form 1099-MISC by the February 1st deadline. You can find additional instructions here on the IRS’s website.
1099 Process Filing Caveat
I know you might not want to hear that there is a caveat to the updated 1099 filing process, but to make sure we are all completely clear on the matter here it is. While the new Form 1099-NEC is required to report nonemployee compensation starting with the 2020 tax year, any prior year’s reporting (i.e. before 2020) will need to be reported on the Form 1099-MISC.
For example, if your accountant discovered a missing report for a 2019 nonemployee compensation payment, then that information will need to be filed on Form 1099-MISC.
Best Practices When Filing 1099s
So now that we’re clear on who should file forms 1099-NEC and 1099-MISC, you’re probably wondering is there anything else you should know when filing your 1099 forms. And there is one thing – let’s call it a best practice. To ensure that you’re prepared to meet the tax compliance obligations for any of your company’s accounts payable, you should always obtain a Form W-9 from any and all vendors you work with.
A Form W-9 is valid indefinitely, but it is good practice to obtain a new W-9 periodically. The W-9 provides key information to you, the payer, including the vendor’s name, taxpayer identification number (TIN), and the type of business entity. In addition, should the IRS ever choose to audit your company (#knockonwood), having W-9 forms handy will indicate a culture of tax compliance within your company and will go a long way in providing comprehensive documentation to the questioning tax authority.
Your 1099 Action Items
Discussing tax forms may make your eyes glaze over but it is always important to stay on top of your game when it comes to your business taxes and minimizing your tax exposure where you can.
If the changes to 1099 filing protocols in addition to the thought of having to file your annual tax return have added to your stress level, we’re happy to help! The best place to start is by booking a discovery call with Simple Startup so we can discuss your overall tax position and help you feel confident when it comes time to file each and every tax form.