The 2020 tax information reporting season is rapidly approaching and the changes we know about so far are pretty complex. A primary example lies in the new Form 1099-NEC which was reintroduced by the IRS last fall and is required to be used for reporting 2020 nonemployee compensation payments (formerly reported in Box 7 of Form 1099-MISC). As if adding a new form wasn’t enough for 2020, the IRS also overhauled the Form 1099-MISC, shifting boxes up on the form and changing reporting requirements in some of those boxes.
Here are five tips to make sure you (and your 1099 service provider) are ready for the 2020 reporting season:
- Identify recipients for which you may need to issue both a Form 1099-NEC and Form 1099-MISC. Nonemployee compensation is paid by U.S. businesses across virtually every industry. Professional services, commissions, referral fees, incentive payments, taxable fringe benefits, and the list goes on. Since Form 1099-MISC is designed to report miscellaneous payments, it is not uncommon for a company to pay both nonemployee compensation and some other type of miscellaneous income to the same recipient. Before 2020, your organization could have reported those transactions all on a single Form 1099-MISC; however, for 2020, you are required to issue and file two separate forms for payments that you make to that same recipient.
- Update your systems. Core operating systems need to be updated to allow you to extract nonemployee compensation data separate from other miscellaneous reporting data. Proactive testing with the tax solution is a best practice to ensure the data is being produced as expected and to minimize the risk of unexpected issues during the busy month of January. Additionally, and likely most pertinent, the IRS just released the Publication 1220 specifications for filing Form 1099-NEC so outputs of the IRS file should be tested in the newly required formats to ensure a smooth submission process during January.
- Investigate all of your options for issuing recipient 1099 statements. The IRS disappointed U.S. businesses in July when they released the annual Publication 1179 which does NOT allow filers to combine the 1099-NEC with any other form. In order to minimize printing and mailing costs associated with duplicate forms, investigate options for putting forms together in the same envelope for the same recipient (a.k.a., ‘householding’) or even better, push your organization to move towards gaining consent from the recipients so you can send them electronic 1099 statements instead.
- Check the health of the name/TIN combinations that will be reported on 1099s. The IRS issues backup withholding notices (i.e., “B” notices) and penalty notices (i.e., “P” notices) to companies that file erroneous name and TIN combinations on 1099s and other information returns. With the potential of duplicate 1099 reporting for many of your recipients, now is the time to proactively check those combinations against the IRS database so that you can get those issues fixed before you file 1099s for 2020.
- Don’t forget the States. Over 40 states now require some form of direct state tax reporting for various 10-series and W-2 forms. The IRS has released the 2020 version of Publication 1220. One of the most notable changes is that Form 1099-NEC (Nonemployee Compensation)—which was previously reported on Form 1099-MISC utilizing Box 7—will not be a Combined Federal/State Filing (CFS) form. This means that Form 1099-NEC cannot be filed with the states through the CFS Program. Some states will continue to require the Form 1099-MISC to be reported for nonemployee compensation. Others will require the Form 1099-NEC in the IRS format. Make sure you know which states your organization is obligated to report to and what those new requirements will look like for both Forms 1099-NEC and 1099-MISC.
Interested in expanding your knowledge of these forms & learning even more best practices? Watch our free on-demand webinar, The Last Chance to Learn About Form 1099-NEC Before Tax Season.