The IRS has gone into the archives and resurrected an old form that will be affecting business owners this tax filing season. It is form 1099-NEC and it has not been around since Reagan was president. Why the resurrection? What is it for? Do I have to file two forms? When is it due? How does it apply to my business? How do I prepare for the change? These are the types of questions that many of our clients have, so we wanted to address them.
Why the resurrection of Form 1099-NEC?
The issue starts with understanding what the new form is designed to report. The 1099-NEC is where you report all nonemployee compensation paid to someone through your business. Now at this point you may be thinking to yourself, “I file a 1099-MISC for that currently” (or as many of our clients call it “a 1099”, even though there are many types of 1099s, think of Coke being used for a soda) and up until this year, you would be right. In the past the 1099-MISC was used to file payments of many kinds paid over $600 for the year to many different types including but not limited to rent, prizes, payments to vendors, etc.
Now you must file a separate form for any nonemployee that you paid for services. This is due to the changes that occurred with the 2015 Protecting Americans from Tax Hikes Act (PATH Act), where Congress changed the rules that Form 1099-MISC forms for nonemployee compensation had to be filed by January 31, instead of the usual February 28 deadline for all other types of payments. Because of the due date change for nonemployee compensation, taxpayers had to begin separating nonemployee compensation using two Form 1099-MISC. This change not only caused a lot of confusion for business owners and taxpayers, but it also caused the IRS to mistakenly treat forms received after the January 31 deadline as late returns. The IRS has brought back Form 1099-NEC to separate nonemployee expenses and clear up the confusion.
What is it for?
Prior to this year, your business would include nonemployee compensation in Box 7 on Form 1099-MISC. Now that box is changed to “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale”, and nonemployee compensation is reported on Form 1099-NEC instead. File Form 1099-NEC, Nonemployee Compensation (NEC), for each person in the course of your business to whom you have paid at least $600 during the year for:
1. Services performed by someone who is not your employee (including parts and materials) (box 1);
You must also file Form 1099-NEC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment. For instructions on these two forms (1099-MISC and 1099-NEC) please go to the following IRS instruction site https://www.irs.gov/pub/irs-pdf/i1099msc.pdf
Do I have to file two forms?
Yes…sort of. You must file a separate form for anyone you paid nonemployee compensation to governed by the rules shown above, but not if you didn’t make any other types of payments to them. For example, let’s say you are a roofing contractor, and you hire an independent contractor to paint the eves after you replace the roof. If this was the only payment you made to them all year and it was greater than $600, then you would file a 1099-NEC, but would not have to worry about filing a 1099-MISC. Now if you paid that same painter a referral commission for sending you some roofing business, then you would have to file a separate 1099-MISC for the commission you paid (different than services performed, because it is not services).
When is it due?
As we mentioned prior, the due date for this form is January 31.
How does it apply to my business?
If you are run your own business and pay someone for services, then you have to file the 1099-NEC form. If you were filing form 1099-MISC box 7 amounts for people, sole-proprietorships, partnerships, and estates prior, then now you are filing form 1099-NEC. If you were paying more than $600 to any of those entity types and were not filing anything, you have a different problem and should call us right away! 😊
How do I prepare for the change?
The best possible solution would be to have a W9 form on file for every person that you paid for anything in your business. Then you analyze your payments and see whom you paid more than $600. Finally, you review the entity designation they checked (if they remembered to do that, because many forget) and you file appropriately based on the above guidelines. The basic information you need to file the forms is:
Your name, address, and phone number
Your TIN (Taxpayer Identification Number)
Recipient’s name, address, and TIN
Total nonemployee compensation
Federal and state income tax withheld (if applicable)
If you need any assistance filing these forms for your business, please do not hesitate to reach out to Grandfield Tax & Business Services, where we are “connected to you for generations.”