As the year comes to a close, we must begin preparing to report its financial impact on our personal and business tax returns. Tax season can be overwhelming for both companies and the workforce — with multiple reporting statuses, each with their own stack of federal and state forms, and fast approaching deadlines.
If you are an independent contractor or the company paying for their services, it is crucial to have a clear understanding of 1099 tax reporting.
In 2020, the IRS introduced the new Form 1099-NEC to specifically report non-employee compensation, currently defined as payments to non-W2 payroll employees. Individuals such as independent contractors, direct selling distributors, consultants, gig workers, affiliates, and other self-employed workers should expect to receive a 1099-NEC (instead of a W-2 form) to report their income to the IRS on their tax return.
In previous years, non-employee compensation payments of $600 and more were reported in Box 7 of form 1099-Misc. Now that the IRS has revived Form 1099-NEC, which was last seen in 1982, businesses are required to report this compensation in Box 1 of the returning form.
These changes are due to The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) in which the due date for filing non-employee compensation moved to January 31st. The filing due dates were previously February 28th for paper filing and March 31st for electronic filing. However, the due dates for all other payments outside of non-employee compensation stayed the same. This change caused widespread confusion and duplicate filing for recipients. The IRS and filers experienced many errors and penalties as a result.
New for 1099-NEC
The most noticeable change on Form 1099-NEC for tax year 2021 is the appearance of Box 2. This box originally appeared in the 2020 draft version, but when the final version of the form was published for use the IRS had inexplicably removed this portion of the form.
Box 2 is now back and must be checked if a payer made direct sales totaling $5,000 or more of consumer products to a recipient for resale. This change is especially important for direct selling companies, and eliminates the need to potentially file two forms if the direct selling company also paid the recipient non-employee compensation.
It is important to have a sound plan in place when businesses decide to use the single Form 1099-NEC for information return because all forms must be filed by January 31st. Generally, for other information returns, businesses can request a 30-day extension. Requests for extensions for 1099-NEC are not allowed unless there is a “catastrophic event,” as defined by the IRS. More information can be found in Box 7 of Form 8809.
Reminders & Tips for 1099-NEC
There are various types of payments filers can report on this form. Below are some reminders and tips when using Form 1099-NEC:
Box 1: Key payments for reporting
- Report services paid to non-employees
- Commissions (standard, contingent, bonuses i.e. for sales)
- Professional fees of all types (Note: Only report payments for legal services. DO NOT report payments made to attorneys related to litigation matter)
- Report gross amount (do not omit fees, withholdings, etc.)
- Value of goods and supplies
- Do not report payments to S and C corporations unless payments are for legal services
Box 4: Backup withholding
- 24% withholding required for any payee that fails to provide TIN. There are automated checks for invalid TINs and no withholding in Box 4. These checks were put in place a year ago by the IRS
- Do not report forms with obvious errors, i.e. SSN 123456789. An automatic penalty notice will be issued
- If businesses are withholding tax, they must also file Form 945 which shows a reconciliation of all tax withheld. Amount on Form 945 must match Box 4 on 1099
- IRS designated a new unit to focus solely on backup withholding and they are actively checking for this in 2021
Combined Federal State Filing Program (CFSF) vs. Direct State Reporting (DSR)
The IRS announced that Form 1099-NEC has been added to the Combined Federal Sate Filing Program(CFSF) in the recent Publication 1220 for tax year 2021. This will relieve the burden of filing 1099s directly with the state since the IRS forwards 1099s filed federally to participating states. There are still 36 states along with the District of Columbia that has their own direct filing requirements. Below are the participating states:
Be Prepared for Tax Season
There are new changes and publications issued federally and by state throughout the year. The best course of action is to prepare for tax season ahead of time so that strict deadlines can be met and errors can be avoided.
Many companies and contractors find that corrections may be needed once the 1099 is filed with the IRS. The corrections can be made by the company, or tax service provider, as needed throughout the year. Payors and payout solution providers, such as PayQuicker, expedite the process and file and distribute 1099s electronically to automate the tedious process of tax reporting.
Terrainna Smith is a Senior Accountant at PayQuicker, where she oversees PayQuicker’s integrated tax services program and more. Terrainna is a Certified Compliance Manager (DSCP-CP, 2021) with nearly 15 years of accounting and finance experience.
PayQuicker is a leading provider of financial transaction and treasury management technology and innovation for a wide range of industries requiring mass payouts to their participants. Our cloud-based, regulatory-compliant, secure software stack offers custom-branded payout solutions that power clients to seamlessly deliver secure, instant payouts to millions of independent contractors, distributors, gig workers, and affiliates around the globe.