Tax professionals around the country are preparing for the new Form 1099-NEC. A lot of confusion surrounds this form. Below are the top 5 things you should be aware of.
1. Form 1099-MISC changed too: 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, gross proceeds paid to an attorney used to be reported in Box 14 of Form 1099-MISC. But, in 2020 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 in 2020, 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 will 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 need to be updated so that the technology can differentiate a 1099-NEC transaction from a 1099-MISC transaction. Also, the Form 945 annual return of withheld federal income tax process will need to be adjusted to ensure that reconciliation of backup withholding includes a comparison to the new Form 1099-NEC. 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. Double the 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 the new Form 1099-NEC introduces to payors.
5. Major state reporting updates: The combined federal/state filing (CF/SF) will not satisfy most states filing requirement for the 1099-NEC form as the due date is January 31st in most states. Companies will have to create a process to produce state transmittals of the 1099-NEC information separate of the 1099-MISC information that was being produced previously. Today, most states follow the 1099-MISC format for submitting NEC income. But, they might modify those systems for the new 1099-NEC form. It is too early to tell.
The IRS will not be including the information reporting data for the new Form 1099-NEC in the Combined Federal/State Filing (CF/SF) program. Businesses will now need to file the form with the states in addition to filing it to the IRS. Click here to read the latest state filing requirements.