By June Callari, CPA, MBA and Vedha Krishnamoorthy, CPA
Beginning with tax year 2020 (Form 1099s filed in January 2021), the new Form 1099-NEC, non-employee compensation, must be used to report payments of non-employee compensation (NEC). These payments were previously reported in box 7 on Form 1099-MISC. Form 1099-NEC is used by payers to report payments made in the course of a trade or business to others for services.
If your organization paid a vendor who is not your employee, such as a subcontractor, attorney or accountant, $600 or more for services provided during the year, a Form 1099-NEC needs to be completed; and a copy of 1099-NEC must be provided to the independent contractor by January 31 of the year following payment. A copy of this form must also be sent to the IRS by January 31.
Non-employee compensation reported on 1099-NEC box 1 includes fees, commissions, prizes and awards for services performed as a non-employee, including fees paid to an attorney. Also included here are cash payments to aquatic life purchased from anyone engaged in the trade or business of catching fish. Note, however, that if gross proceeds were paid to an attorney for settlement of a claim, even if the settlement includes attorney fees, this payment is recorded on 1099-MISC in box 10. Any payments reported on Form 1099-NEC are no longer reported on Form 1099-MISC.
Form 1099-MISC box 7 (previously used to report non-employee compensation) is now used to report direct sales of $5,000 or more. Also note that other boxes on Form 1099-MISC have been rearranged. See 2020 Instructions for Forms 1099-MISC and 1099-NEC for more detail.
If you’ve made the determination that the person you’re paying is an independent contractor, the first step is to have the vendor complete Form W-9, Request for Taxpayer Identification Number and Certification. If the recipient does not provide the requested name and Taxpayer Identification Number, they will be subject to 24% backup withholding. It is advised to have the independent contractor complete the Form W-9 prior to making payment to them. You may use this link to Form W-9, which can be sent to independent contractors.
Electronic filing of 1099 forms is required when an organization is filing 250 or more information returns for the tax year 2020. For partnerships, the e-file requirement takes effect with 100 or more information returns. These thresholds for e-filing will decrease to 100 information returns filed for tax year 2021 (50 forms for partnerships). In 2022, the requirement for e-filing information returns decreases to just 10 forms.
While the general rules regarding issuance of Forms 1099 remain the same, the form on which they are reported has changed to the new form 1099-NEC, for non-employee compensation. Additionally, the thresholds for electronic filing are decreasing, requiring more organizations to e-file 1099s and other information returns.
For more information on this topic, please contact June Callari, Manager, or Vedha Krishnamoorthy, Manager, in the Small Business Department at Tronconi Segarra & Associates. They can be reached at JCallari@tsacpa.com and VKrishna@tsacpa.com or (716) 633-1373. Learn more about Tronconi Segarra & Associates by visiting our online home at www.tsacpa.com.