Tax Services New for Tax Year 2020: Form 1099-NEC
 
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It’s that time again! 1099 filing season is here. With a new form for tax year 2020—Form 1099-NEC—certain payments will need to be reported differently. Here are some key considerations for using the new Form 1099-NEC:

What is Form 1099-NEC?

Form 1099-NEC is used to report nonemployee compensation payments over $600. Previously, this type of compensation was reported in Box 7 of Form 1099-MISC.

The most common payments reported on Form 1099-NEC box 1 will be payments for services performed by someone who is not your employee (typically referred to as an independent contractor) and payments to an attorney. All other traditional Form 1099-MISC payments, such as rent, other income, or royalties, will continue be reported on Form 1099-MISC.

How should payments to attorneys be reported?

Payments to attorneys of $600 or more will be reported on either Form 1099-MISC or Form 1099-NEC according to the following rules:

  • Attorney fees paid in the course of your trade or business for services an attorney renders to you are reported in box 1 of Form 1099-NEC.
  • Gross proceeds paid to an attorney in connection with legal services, but not for the attorney’s services, are reported in box 10 of Form 1099-MISC.

The IRS outlines the following example: An insurance company pays a claimant’s attorney $100,000 to settle a claim. The insurance company reports the payment as gross proceeds of $100,000 in box 10 of Form 1099-MISC. The insurance company does not have a separate Form 1099-NEC reporting requirement for the claimant’s attorney’s fees paid from these funds.

When are Form 1099-NEC and Form 1099-MISC due?

Form 1099-NEC and Form 1099-MISC are due to the IRS on different dates. Form 1099-NEC is due by February 1, 2021, while Form 1099-MISC is due by March 1, 2021. However, both forms must be sent to recipients by February 1, 2021.

Potential complications

State reporting

The IRS announced that the Form 1099-NEC will not be included in the IRS 1099 Combined Federal/State Filing Program (CF/SF). Under this program, the IRS sends Form 1099-MISC information to the 30 states that participate, which means companies do not have to file separately with those states. However, for Form 1099-NEC, if you are reporting to states that require submission of Form 1099-NEC information, you must submit a separate state filing in the format required by that jurisdiction. A number of states have issued specific guidance regarding Form 1099-NEC reporting, but it is expected that more will follow. It will be important to understand the reporting requirements for the state in which the form issuer does business, the state where the payee resides, and the state in which the services were performed. Filers will also need to understand the state’s filing deadlines and e-file requirements.

Composite statement rules

Many companies have payees that receive nonemployee compensation and some other type of income. In the past, those amounts could be included on one Form 1099-MISC. Per IRS Publication 1179, Form 1099-MISC and 1099-NEC payments cannot be combined onto one statement. The recipient will need to receive a Form 1099-NEC for nonemployee compensation and a Form 1099-MISC for other types of income.

Filing the wrong form

It is important to file the correct form because filing the wrong form could result in a penalty for not issuing the correct form to the recipient as well as a separate penalty for each form filed past the form due date, once the correct form is filed.

Need help?

Do you have other questions about issuing these forms, concerns about meeting the filing deadline, or a special circumstance that is difficult to navigate? P&N professionals are ready to assist! Contact us for help working through your tax challenges.

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