This blog was last updated on 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.
