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

Wendy Walker
December 13, 2020

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.

Take Action

Despite the IRS including Form 1099-NEC in the Combined Federal/State Filing (CF/SF) program for tax year 2021 most states still require direct reporting. Businesses 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.

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

North America Tax Information Reporting
March 22, 2024
Market Conduct Annual Statement Reminders and More

On the second Wednesday of each month, Sovos experts host a 30-minute webinar, Water Cooler Wednesday, to share the latest updates on statutory filings. In March, Sarah Stubbs shared information about the many filings due after March 1, from Market Conduct Annual Statements to health supplements for P&C and life insurers writing A&H businesses and […]

North America ShipCompliant
March 21, 2024
How Producers Can Build a DtC Shipping Market

Direct-to-consumer (DtC) shipping has become one of the leading sales models for businesses of all sizes and in all markets. The idea of connecting directly with consumers is notably attractive, as it helps brands develop a personal relationship and avoid costly distribution chains. Yet, for all its popularity, DtC is often a hard concept to […]

North America ShipCompliant
March 20, 2024
Key Findings from the 2024 DtC Beer Shipping Report

This March, Sovos ShipCompliant released the fourth annual Direct-to-Consumer Beer Shipping Report in partnership with the Brewers Association. The DtC beer shipping report features exclusive insights on the regulatory state of the direct-to-consumer (DtC) channel, Brewers Association’s perspective and key data from a consumer preferences survey. Let’s take a deeper dive into some of the […]

March 20, 2024
As the World Gets Smaller, Think Bigger About Global Tax Compliance

For the past few weeks back, my colleagues and I have been talking a lot about the importance of a global strategy when it comes to addressing today’s modern tax environments. On the heels of Sovos introducing the Sovos Compliance Cloud, many in our company’s leadership team have blogged about related topics and the critical […]

North America ShipCompliant
March 12, 2024
Florida HR 583 Set to Uncork Larger Format Wine Bottles

Florida wine lovers could soon enjoy a bigger selection of bottles based on a recent bill passed by the state’s legislature (HR 583) that would remove the existing cap on wine bottle sizes. What is Florida’s HR 583 bill? Currently, Florida law prohibits the sale of wine in bottles larger than one gallon (a little […]