If you pay contract workers or suppliers in the US, you probably already know you need to collect a Form W-9 from each contractor and supplier, and send them (and the IRS) a copy of a Form 1099-MISC at the end of the year.
This process is now changing a little bit for the 2020 tax year, and we’ve put together some of the must-know information related to those changes.
What is Form 1099-NEC
The Form 1099-NEC is the revival of a form that hasn’t been used since 1982. NEC stands for “Nonemployee compensation”. You can see what a draft version of that form looks like here.
(The IRS warns: This is an early release draft of an IRS tax form, instructions, or publication, which the IRS is providing for your information. Do not file draft forms and do not rely on draft forms, instructions, and publications for filing.)
Why is the IRS bringing Form 1099-NEC back?
In 2015 the PATH Act moved the due date for Form 1099-MISCs that contain nonemployee compensation from February 28 to January 31. The PATH Act also eliminated the automatic 30 day filing extension for any Form 1099-MISC that includes nonemployee compensation.
Because of this, if an employer filed several Form 1099 MISCs with the IRS that both contained nonemployee expenses and ones that didn’t - all at the same time, after the January 31st deadline - the IRS might mistakenly treat all received forms as late returns and apply fines.
The different filing deadlines that applied depending on the type of payments claimed in the Form 1099-MISC caused admin issues and additional time for the IRS to properly sort through the forms. There are also some tax-filing deadlines on the taxpayer side that didn't align properly with the 1099-MISC deadlines, which opened up the system for fraud (source: Forbes).
Due to these issues, they have revived the Form 1099-NEC to separate these nonemployee expenses, and filing deadlines.
What types of compensation needs to be reported on Form 1099-NEC?
All nonemployee compensation must be reported on the Form 1099-NEC. Nonemployee payments are any person or business you’ve paid more than $600 in a tax year in exchange for performance of services. These payments can be:
- Other forms of compensation for services
What do I need to do differently as a business?
If you don’t already, you should be separating your nonemployee compensation payments from all of your other 1099-MISC payments. If you’re doing all of the 1099 preparations manually, keeping these nonemployee compensation payments separate will save you a ton of time at the end of the tax year.
Of course, when the end of the 2020 tax year comes, you will also need to remember to actually fill out the Form 1099-NEC instead of the Form 1099-MISC for all of the nonemployee compensation payments.
How can Payment Rails help?
If you’re already using Payment Rails, we will handle all your reporting needs when it comes to Form 1099-NEC.
Payment made to individuals and businesses via Payment Rails will be tracked, and we will produce the properly filled-out Form 1099-NEC at the end of the 2020 tax year and send it (electronically or via the postal service) to the person or business.
We will also provide you with an IRS e-file in the proper format to upload the 1099-NEC data in the IRS fire system.