On July 24, 2019, the IRS released a draft 2020 Form 1099-NEC, which lent credibility to the suspicion that nonemployee compensation payments will be bifurcated from the 1099-MISC, where they’ve previously been reported. This assumption was confirmed on August 19, 2019 when the IRS released a draft 2020 Form 1099-MISC that excluded Box 7 for reporting nonemployee compensation. While the 1099-NEC won’t be applicable for the 2019 filing season, it’s expected to be required for the 2020 filing season for payments of nonemployee compensation.
The IRS’s decision to resurrect Form 1099-NEC was driven by confusion surrounding the expedited deadline of January 31 for reporting nonemployee compensation on Box 7 of the Form 1099-MISC, where the form was not required to be filed with the IRS for other types of income until February 28 or March 31. Form 1099-NEC, which hasn’t been used in over 30 years, is hoped to clarify the early filing requirement, specific to nonemployee compensation reporting.
Form 1099-NEC was originally created solely for reporting payments of nonemployee compensation to US payees. However, in an expansion of the 1099-MISC that took place in 1983, nonemployee compensation was added to the 1099-MISC along with fishing boat proceeds, medical and healthcare payments, and tax withheld. Accordingly, for the last 30-plus years, Form 1099-NEC has been obsolete.
However, in 2015, the IRS identified a fraud risk wherein filers were submitting Forms 1040 to claim a refund of tax withheld, prior to the IRS receiving Forms 1099-MISC from payers. Due to the IRS’s inability to match the tax returns with a filer’s version of Form 1099, there were reports of fraudulent refunds that were awarded. The resulting PATH Act, passed in 2015, modified the reporting deadline for nonemployee compensation—along with Forms W-2—to January 31.
Due to the confusion caused by establishing multiple filing deadlines for a single form, the IRS has taken a throw-back approach, and once again separated nonemployee compensation from the Form 1099-MISC.
The current draft Form 1099-NEC appears very similar to the other 1099 series forms requiring comparable static data such as name, address, and Tax Identification Number (TIN). However, the draft Form 1099-MISC and 1099-NEC raise questions about the potential for overlap in reporting payment information. For instance, it’s unclear if certain payments, such as nonqualified deferred compensation, will be required to be reported on both Forms 1099. Hopefully, the forms’ draft instructions will clarify the path forward with these new information return reports.
Impact on Filers
Information reporting requirements are becoming increasingly complicated each year. This update will force filers to separate nonemployee compensation filing from other traditional 1099-MISC reporting. For some filers, this may allow additional time for 1099-MISC filing for income that’s outside of nonemployee compensation.
Penalties also continue to increase. For 2019 filings, penalties are applied at $50 for information return reports filed after the deadline but within 30 days, and they increase to $110 for returns filed after 30 days beyond the deadline but before August 1, 2020. Information return reports filed incorrectly after August 1, 2020, or not at all, will have a penalty of $270 per form.
To contend with the complexity introduced by these measures and avoid penalties, it’s more important than ever to prepare for filing season in advance.
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For more information on how this update could affect you and your business, contact your Moss Adams professional or email email@example.com.