January 14, 2021
New Rules for Federal Non-Employee Compensation Reporting
Starting in 2021, any business, including sole proprietors, regardless of size, that pays at least $600 for services performed for their trade or business by a person who is not an employee is required to file Form 1099-NEC for tax year 2020 and all years going forward. The Internal Revenue Service estimates that 70% of business filers will need to file the new Form 1099-NEC to report non-employee compensation.
Why the change?
Prior to 2020, non-employee compensation was reported in Box 7 on Form 1099-MISC. The Protecting Americans from Tax Hikes (PATH) Act passed in 2015, which changed the due date for reporting amounts in Box 7 to January 31. The deadline for reporting most other information on Form 1099-MISC remained on February 28, if filing on paper, and March 31, if filing electronically.
This posed administrative problems that resulted in major inconveniences for filers. If a filer submitted a batch of 1099-MISC forms to the IRS after January 31, and any of the forms had an amount in Box 7, the IRS would send a late filing notice to the filer for the entire batch. The filer would then have to rectify the situation with the IRS, indicating which forms in the batch had not been filed on time.
To eliminate this cumbersome process, the IRS reinstated Form 1099-NEC, which has not been used since tax year 1982. Form 1099-NEC is used to report non-employee compensation separately from other types of income reported on Form 1099-MISC. The filing deadline for this form is earlier than for Form 1099-MISC. Since January 31, 2021 falls on a Sunday, Form 1099-NEC must be filed on or before February 1, 2021. Form 1099-NEC may be submitted by paper or electronic filing procedures.
Who must file?
The new Form 1099-NEC impacts a wide array of business filers, ranging from small businesses to Fortune 500 companies. More specifically, the IRS indicated that businesses should file the new form for each person to whom they have paid at least $600 for:
- Services performed by someone who is not an employee (including parts and materials) (box 1);
- Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish (box 1); or
- Payments to an attorney (box 1).
Businesses must also file a separate Form 1099-NEC for each person from whom they have withheld any federal income tax (reported in box 4) under the backup withholding rules, regardless of the amount of the payment.
Who should receive Form 1099-NEC?
Form 1099-NEC is issued to individuals and businesses such as independent contractors, accountants, attorneys, and any other worker paid for services rendered independently of the paying organization. To be certain, individuals and businesses can complete IRS Form W-9 (www.irs.gov/pub/irs-pdf/fw9.pdf).
Companies must request and review a W-9 provided by the non-employee service provider. If the W-9 indicates the service provider is:
- an individual/sole proprietor or single-member LLC, or
- an LLC that is taxed as a sole proprietorship, they will be required to issue Form 1099-NEC.
If their LLC is taxed as an S- or a C-Corp, they will not be required to receive a 1099-NEC.
Please note that there are instances in which Form 1099-NEC must be issued to C Corporations and S Corporations. Form 1099-NEC must be issued if the following types of payments have been made:
- Medical and health care payments
- Payments to attorneys
- Substitute payments in lieu of dividends or tax-exempt interest
Please refer to the 1099 Decision Tree below. Services are reported on 1099-NEC; Rent and Royalties are reported on 1099-MISC.
Additional information and forms may be obtained from the forms database on the Internal Revenue Service website: https://www.irs.gov/forms-pubs/about-Form-1099-NEC.
If you would like further guidance about non-employee compensation filing requirements, please do not hesitate to contact us.