Business Tax Update: New 1099 Nonemployee Compensation Tax Form for 2020 Tax Year

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Reading Time: 3 minutesAfter a 38-year absence, Form 1099 Nonemployee Compensation Tax has made its return in the 2020 tax year, and its January 31 deadlines are right around the corner.  Don’t panic – here’s everything you need to know about the revived form, and how it is intended to be used. For the last few decades, business owners were responsible for using Form 1099-MISC to report nonemployee compensation. But now, with Form 1099-NEC available, employers can say hello to a revamped form (intended for payments to independent contractors) and goodbye to reporting nonemployee compensation on Form 1099-MISC. (Insert three cheers from business owners and accountants alike.)

Why is the IRS bringing back Form 1099 Nonemployee Compensation Tax ?

The 2015 Protecting Americans from Tax Hikes Act (PATH Act) essentially moved the Form 1099-MISC due date from February 28 up to January 31 for reporting nonemployee compensation, and forced taxpayers to begin separating nonemployee compensation using two Forms 1099. This change not only caused a lot of confusion for business owners and taxpayers, but it also caused the IRS to mistakenly treat forms received after the January 31 deadline as late returns. The IRS has brought back Form 1099-NEC to separate nonemployee expenses and clear up the confusion.

How to Use ‘Form 1099-MISC’ for 2020 Tax Year

Form 1099-MISC, Miscellaneous Income, is an information return businesses use to report payments (e.g., rents and royalties) and miscellaneous income. Businesses should file Form 1099-MISC for each person you have given the following types of payments to during the tax year:
  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
  • At least $600 in the following:
    • Rents
    • Prizes and awards
    • Other income payments
    • Cash from a notional principal contract to an individual, a partnership, or an estate
    • Any fishing boat proceeds
    • Medical and health care payments
    • Crop insurance proceeds
    • Payments to an attorney
    • Section 409A deferrals
    • Nonqualified deferred compensation
Do not use Form 1099-MISC for W-2 employees. And as of tax year 2020, do not use Form 1099-MISC to report independent contractor payments (that’s where Form 1099-NEC comes into play).

How to Use ‘Form 1099-NEC’ for 2020 Tax Year

Overview of Form 1099-NEC, Nonemployee Compensation:
  • A form that is used solely to report nonemployee compensation.
  • It is not a replacement for Form 1099-MISC. Form 1099-NEC is only replacing the use of Form 1099-MISC for reporting independent contractor payments.
  • The 1099-NEC is actually not a new form. It was last used in 1982, and the IRS has revived the form for 2020 tax reporting.

What is reported on 1099 Nonemployee Compensation Tax ?

Again, use a 1099-NEC form to report nonemployee compensation, including the following payment types to independent contractors:
  • Fees
  • Commissions
  • Prizes
  • Awards
  • Other forms of compensation for services (such as directors’ fees)
You must typically report a payment as nonemployee compensation if all of the following conditions apply:
  • You made the payment to an individual who is not your employee
  • The payment was for services in the course of your trade or business
  • You made the payment to an individual, a partnership, an estate, or a corporation
  • Payments to the payee were at least $600 during the year

Form 1099-NEC Deadlines for Employers

Not only do employers need to keep the new 1099-NEC on their radars, but they also need to mark their calendars for a new nonemployee compensation due date. Starting in 2021, send copies of Form 1099-NEC to workers you paid nonemployee compensation to during the year by January 31 or the next business day (if it falls on a weekend), and also file Copy A with the IRS by January 31 each year. Should you have any questions regarding the Form 1099s or tax planning for your business, contact a KCoe advisor.
Related Read: Business Tax Update: Many Meal and Entertainment Deductions Have Increased

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