IRS Brings Back Old Form for Businesses to Report Non-Employee Compensation by Cherry Laufenberg, CPA
Businesses that usually file IRS Form 1099-MISC to report payments they make to independent contractors, gig-economy workers and outside consultants should prepare for change in the coming year.
Effective for tax years beginning in 2020, the IRS requires businesses to report nonemployee compensation totaling $600 or more on Form 1099-NEC rather than including it on Form 1099-MISC. The new form separates out the compensation businesses make to freelancers and consultants, such as attorneys and accountants, from their payments of rent, royalties, and healthcare expenses, which is still reportable on Form 1099-MISC. Therefore, businesses may be required to complete both forms for tax year 2020.
Who Must Use Form 1099-NEC?
Taxpayers required to use Form 1099-NEC include businesses, non-profit organizations and trusts of qualified pension or profit-sharing plans that, in the normal course of carrying out their businesses, 1) paid at least $600 to an individual who was not a W-2 employee or 2) withheld federal income tax (under the backup withholding rules) from any amount of payments made to individuals who are not W-2 employees. Applicable payments include those made to individuals, partnerships, estates or, in some cases, corporations.
According to the IRS, common examples of nonemployee compensation reportable in Box 1 of Form 1099-NEC include, but are not limited to, the following:
- Payments to independent contractors, freelancers and gig-economy workers;
- Professional services fees paid to accountants, lawyers, architects, engineers, etc.;
- Fees paid by one professional to another, such as fee-splitting or referral fees;
- 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;
- Commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year;
- Prizes and awards for services performed by a nonemployee;
- Exchanges of services between individuals engaging in the normal course of their respective trades or businesses; and
- Taxable fringe benefits for nonemployees.
Amounts reported in Box 1 generally are subject to self-employment tax. If payments to individuals are not subject to this tax and are not reportable elsewhere on Form 1099-NEC, taxpayers should report the payments in Box 3 of Form 1099-MISC.
What are the Deadlines for Filing Forms 1099-NEC and 1099-MISC for 2020?
Businesses must file Form 1099-NEC with the IRS and furnish copies to each payee by Feb. 1, 2021. This deadline cannot be extended unless a taxpayer can demonstrate a qualifying hardship.
Form 1099-MISC must be furnished to payees by Feb. 1, 2021, but businesses have until March 31, 2021, to file Form 1099-MISC with the IRS.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
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