IRS Disappoints Direct Sellers with Recent 2020 Form 1099-NEC Reporting Requirements

Wendy Walker
July 21, 2020

On July 17th, the IRS released Revenue Procedure 2020-35 which is the annual version of Publication 1179 General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. The annual publication contains IRS format requirements for issuing Forms 1099 and other information returns to recipients and for the versions that will be filed with the IRS. 

Unfortunately, the IRS did not deliver the requirements that Direct Sellers and other payors were hoping for. While the new Form 1099-NEC was formally added to the publication allowing payors to issue a substitute version; the publication does not specify that payors may combine the Form with any other Form 1099 for purposes of delivering a consolidated version to the recipient. This means that payors may not issue a combined Form 1099-NEC and Form 1099-MISC for 2020 payments made to the same recipient.

In 2019, some 80% of Sovos clients reported a value in Box 7 of Form 1099-MISC and also reported a value in some other box on the 1099-MISC form. For the upcoming 2020 reporting season, these same payors will now have to report two separate forms.

Background

Last July, the IRS resurrected Form 1099-NEC for reporting nonemployee compensation payments citing ongoing issues with implementing the PATH Act of 2015. Among other things, the PATH Act accelerated the filing due dates for reporting wages on Form W-2 and nonemployee compensation on Form 1099-MISC in Box 7 to January 31. However, since Form 1099-MISC contains a variety of other boxes of income payments that are not due until March 31, the IRS struggled to differentiate between when forms had been filed timely. As a result, erroneous penalties were issued to payors and to alleviate the issue, the IRS revived the more than 30-year-old tax form for reporting starting with payments made in 2020. 

Direct Sellers must issue both Forms 1099-MISC and NEC for reseller payments

One of the most impacted payors by the new form changes is the multi-level marketing industry. Prior to the changes, the bulk of the tax reportable obligations were all completed on a single Form 1099-MISC for the same recipient. But for 2020 reporting, Direct Sellers are required to issue Form 1099-MISC when they sell at least $5K in consumer products for resale and Form 1099-NEC for nonemployee compensation payments, such as commissions of at least $600 paid to the same recipient. Two forms, one recipient.

For Direct Sellers, the inability to combine the two forms for issuing a consolidated tax statement to the recipient is an enormous letdown because the cost of issuing duplicate Forms 1099 is not inexpensive, especially to a small business owner. The Direct Selling Association wrote comments to the IRS this month highlighting the issue citing that the majority of their members are part-time workers and this duplicate reporting requirement creates a significant burden.

So why does the IRS want two forms?

Likely for the same reason they resurrected the Form 1099-NEC to begin with. The legal requirements for businesses reporting payments of nonemployee compensation follow the PATH Act—now required to be filed by January 31. The reporting on Form 1099-MISC for reseller payments follows requirements for Direct Sellers outlined under different areas of the tax law. 

And, the IRS has proven that they cannot manage the complexity of a single form with multiple filing due dates. That’s what got us here in the first place.

 

For more information on how 1099-NEC impacts 1099-MISC reporting, watch the on-demand webinar, 1099-NEC form – How to prepare for it

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Wendy Walker

Wendy Walker is the principal of Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

E-Invoicing Compliance EMEA
August 12, 2020
Portugal: Details on the QR Code and UUID Expected

In February last year, the Portuguese government published the Law Decree 28/2019 rolling out changes affecting e-invoices. The goal of the Law Decree is to simplify and consolidate pieces of law that are scattered around the Portuguese legal framework. However, the effectiveness of many of those rules is still dependent on further regulation, such as […]

ShipCompliant
August 11, 2020
10 Steps to Expand Your Winery

Looking to enter a new market or bring new wines to the marketplace? Growing any business can be complicated, and the beverage alcohol industry is no exception. Not knowing how or where to begin can be the biggest hurdle. From market research and branding to strategic considerations and compliance, this 10-step guide will get you […]

ShipCompliant
August 10, 2020
Ask Alex: Your Bev Alc Compliance Questions Answered (August 2020)

Do you have questions about the rules, regulations, and compliance requirements of the beverage alcohol industry? This series, Ask Alex, is a perfect opportunity to get those pressing questions answered straight from one of the industry’s regulation and market experts, Alex Koral, Senior Regulation Counsel, Sovos ShipCompliant.  To take advantage of this opportunity and get […]

Tax Compliance
August 7, 2020
GAO Urges IRS to Overhaul 1099 Reporting for the Gig

A couple of weeks ago, the Government Accountability Office (GAO) released a report to the Senate Finance Committee describing the issues the IRS faces in enforcing income tax compliance for gig economy workers. The report highlighted long-standing issues the government has been grappling with in receiving tax information necessary to enforce compliance along with specific […]

EMEA VAT & Fiscal Reporting
August 4, 2020
New VAT Rules for Online Marketplaces and Imports of Goods into the UK

The United Kingdom’s HMRC has issued new guidance on the VAT treatment of cross-border sales of goods and online marketplaces beginning 1 January 2021, following the end of the transition period. Cross-Border Sales under £135 New rules will apply when a business sells goods for £135 or less to a UK customer and the goods […]