Changes to 1099 Reporting of Nonemployee Compensation

By Stanley Rose November 23, 2020

The IRS has rolled out a new form for payers to use when reporting nonemployee compensation, separating it from the historical use of Form 1099-MISC.

Nonemployee compensation for years has been reportable on line 7 of Form 1099-MISC, but beginning with 2020 forms, filers instead will report nonemployee compensation on Form 1099-NEC. This change, we are told, is designed to “increase compliance.”

Unlike the catch-all that is Form 1099-MISC, Form 1099-NEC is a single-use form, reporting only nonemployee compensation, as well as taxes withheld from the payments, if any.

Observation: Separating nonemployee compensation from the balance of the 1099-MISC hodge-podge presumably will make it easier for the IRS to compare a business’ headcount of employees vs. independent contractors, simply by viewing their W-2s and their 1099-NECs. Why does this distinction matter so much? A true employee is entitled to certain benefits, such as participation in retirement and health care plans; and employers are required to not only withhold a portion of employees’ pay to submit to the IRS in the form of income tax and employment tax, but also must match a portion of that withholding from its own pockets. Purely from a financial and administrative perspective, the party making the payments would prefer to treat payment recipients as nonemployees instead of employees (less reporting, less expensive). To protect rank-and-file workers and collect taxes on a more timely basis, and armed with downright squishy rules governing whether a worker is an employee or an independent contractor (see colleague Drew Blaney’s article on this topic), the IRS and DOL often assert employee status, even when payments are reported on a 1099. Payroll tax audits, often morphing from routine tax return audits (Form 1120 or 1065, etc.), are on the rise.              

Although there may be exceptions, generally Form 1099-MISC will now report pay that is subject only to income tax, while Form 1099-NEC will report pay that is also subject to self-employment tax, which adds as much as 15.3% to the recipient’s tax burden.

The reporting threshold

The $600 reporting threshold remains unchanged. If you pay at least that amount to a particular recipient in a tax year, that recipient is due a 1099-NEC.

Filing deadlines

The question “when are Forms 1099 due?” unfortunately cannot be paired with a simple “one size fits all” answer. First, different forms in the 1099 series have different deadlines. Also, recall that these forms are provided by the payer to both the IRS and the pay recipient; and different dates apply to both. Finally, the deadlines to provide copies to the IRS can vary depending on whether the forms are e-filed or paper-filed. 1099-MISC forms are due to recipients by February 1, and to the IRS on March 1 or March 31, respectively, for paper or e-filers. 1099-NEC forms are due to recipients and the IRS by February 1, regardless of the method of filing.

Odds and ends

Similar to other forms in the 1099 series, you only file if payments were made in your capacity operating a trade or business. If you pay a plumber at least $600 to fix your family’s kitchen sink at your residence, a 1099 is not required. If the plumber instead repairs your company’s hot water tank for that amount, a 1099 is needed.

Payments made to corporations generally are not reported on a Form 1099-MISC or 1099-NEC. An exception that does require a 1099-NEC is a payment made to a law firm, whether or not incorporated. (Note that proceeds reported to an attorney on behalf of a client are reported on Form 1099-MISC. By contrast, fees paid to an attorney in exchange for professional legal services belong on Form 1099-NEC.)

Links

Instructions for 1099-MISC and 1099-NEC

Form 1099-MISC

Form 1099-NEC

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.