The Top 5 Things Tax Professionals Need to Know About Form 1099-NEC

This blog was updated on February 10, 2023

With the introduction of Form 1099-NEC in 2020, the way filers report non-employee compensation and use Form 1099-MISC has changed. Below are the top 5 things to keep in mind when reporting Form 1099-NEC

1. Remember Form 1099-MISC changes: Because the IRS also adjusted the layout of Form 1099-MISC, payors will need to analyze how the source transaction systems are configured for Forms 1099-NEC and 1099-MISC. For example, before 2020, gross proceeds paid to an attorney were reported in Box 14 of Form 1099-MISC. However, since 2020 and onward, those amounts need to be reported in Box 10 of the form.

2. Reporting a 1099-NEC and a 1099-MISC for the same recipient: For Sovos, 80+ percent of clients that reported Box 7 of the Form 1099-MISC last year also reported a value in some other box on the form for the same recipient. This means that for tax year 2020 and on, the client needs to issue two separate forms for that single recipient. Configuring a source transaction system to produce two different forms for a single recipient is complex and the related operational issues are difficult to manage.  Some more common examples of where two forms may need to be issued are detailed below.

• Attorney payments: When an attorney performs services related to a specific litigation matter, the payments are reportable on the 1099-MISC in Box 10 Gross Proceeds Paid to An Attorney. When an attorney performs services related to general business matters, the payments are reported on the new 1099-NEC. General legal services include things like reviewing contracts, providing advice on employment hiring issues or reviewing real estate contracts. In the event the organization is using the same law firm or attorney to provide both types of services, separate 1099 forms need to be reported for the different payments.
• Direct sales: The new version of the 1099-MISC form contains a checkbox in Box 7. However, many payors that check this box also report the related nonemployee compensation payments to the recipient. By keeping this checkbox on the 1099-MISC form and separating the NEC, many payors will now have an obligation to issue two forms for the same recipient.

3. Backup withholding: Withholding tax processes should have been updated prior to 2020 reporting to ensure your technology could differentiate a 1099-NEC transaction from a 1099-MISC transaction. Also, the Form 945 annual return of withheld federal income tax process should have been adjusted to ensure that reconciliation of backup withholding includes a comparison to Form 1099-NEC. If not done previously, payors will need to consider whether another general ledger liability account should be established to track the NEC backup withholding and what kinds of operational reports are needed for proper reconciliation, remittance and reporting.

4. Additional risk of B-notices: The IRS assesses failures based on each 1099 issued that contains erroneous information. In the event that a recipient provides incorrect name/TIN information and the company issues both forms, the company will receive a B-notice and proposed penalty for each of the 1099 forms filed with the incorrect information. It is more important now than ever to ensure that name/TIN combinations are correct to minimize the risk that Form 1099-NEC introduces to payors.

5. Remember state reporting obligations: Form 1099-NEC has included combined federal/state filing program (CFS) since tax year 2021. However, this does not mean that the CFS program will satisfy 1099-NEC reporting obligations for all states. Not keeping up with DSR obligations can lead to costly penalties, up to $100 per return in some states.