Fernway DiarySM

Jan 13, 2022

Beginning in tax year 2020, the Internal Revenue Service has introduced a form to separate the reporting of nonemployee income from the reporting of various other types of income covered by the 1099-MISC. The 1099-NEC (nonemployee compensation) form is not wholly new, as it is a redesign of an IRS form last used in 1982. In recent decades, though, nonemployee income has been reported in box 7 of the 1099-MISC (Miscellaneous) form.

This recent change was deemed necessary due to confusion arising from an adjustment in filing deadlines in 2015, when the Protecting Americans from Tax Hikes (PATH) Act was passed. The law changed the filing deadline for forms including nonemployee compensation to January 31 from February 28, as well as eliminating the automatic 30-day extension for forms that included nonemployee compensation. However, it did not change the deadline for reporting other types of information included on the 1099-MISC to the IRS, which remain at February 28 for paper filing and March 31 for electronic filing. (Statements to recipients are due on January 31.)

Using the same form to report information with two different deadlines has proven needlessly complex and liable to produce filing errors. To alleviate the problem while ensuring that nonemployee income is reported to the IRS by the statutory deadline, Form 1099-NEC is now required for businesses reporting payments to nonemployees.

When You Need to File

If a business paid $600 or more to someone who is not classified as an employee in the course of a year (e.g., an independent contractor or an outside professional), it must file Form 1099-NEC to report that compensation. This includes payments for services performed by someone who is not an employee (including parts and materials) or payments made to an attorney. This form must also be filed for any person from whom the business has withheld any federal income tax under backup withholding rules, regardless of the amount of payment.

1099-NEC reporting includes payments made in the course of trade or business, not personal payments. Organizations required to report include:

• Businesses
• Sole proprietors
• Nonprofits
• Trusts of qualified pension or profit-sharing plans of employers,
• Certain organizations exempt from tax under section 501(c) or 501(d)
• Farmers’ cooperatives exempt from tax under section 521
• Widely held fixed investment trusts
• Federal, state, and local government agencies

As on the 1099-MISC, amounts are reported in gross rather than net. Keep in mind that certain exceptions apply to what should be reported on a 1099-NEC. For example, while legal fees paid directly to an attorney should be reported using this form, gross proceeds paid to an attorney (such as a settlement payment) should be reported using the 1099-MISC. In general, these exceptions mirror those that applied when nonemployee income was reported on the 1099-MISC. (For questions regarding required reporting, additional exceptions, and/or the correct form with which to report a potentially taxable payment, businesses should consult a tax professional.)

Form 1099-NEC is due to both the IRS and recipients on January 31, 2022, for the 2021 tax year.

Additional Considerations

In cases where a business has made payments to the same individual for different purposes—such as compensation for professional services and rent—they may need to file different 1099 forms to correctly report the compensation. Payments should be carefully tracked and categorized throughout the year to ensure accuracy.

Businesses should also be aware of state filing requirements. While many states participate in the Combined Federal/State Filing (CF/SF) program, which ensures that data from the various 1099 forms are shared with the states, not all do. If the vendor or contractor resides in a different state, it’s possible that 1099-NECs will need to be filed directly with their state of residence. It is the business’s responsibility to determine and meet any separate state filing requirements.

Timely and accurate filing of the appropriate 1099 forms is a necessity for any business. Those needing clarity or assistance are advised to seek professional advice to avoid mistakes.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:

The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.