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Are You Ready for the New Form 1099-NEC?

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With the end of the year approaching, now is a good time to be sure you have everything you need to complete your year-end filing requirements. Key documents, such as the Form 1099-MISC and the new Form 1099-NEC, need to be submitted to recipients by February 1, 2021.

The newest form the IRS has introduced, Form 1099-NEC, will be used to report nonemployee compensation for 2020. Prior to 2020, Form 1099-MISC, box 7, was used to report nonemployee compensation.

Forms 1099-MISC and 1099-NEC are required to be filed only if the payments are made in the course of business. For example, if you are an individual who pays an electrician $1,500 for work on your home, you are not required to file a form 1099-NEC or 1099-MISC. However, if you pay an electrician $1,500 for work at your office, you are required to file the applicable form.

If you file Form 1099-NEC, you do not also have to file a form 1099-MISC for the same payment.

Failure to correctly file forms 1099-NEC and 1099-MISC could lead to costly penalties. The 1099-NEC must be filed with the IRS by February 1, 2021, and the 1099-MISC must be filed with the IRS by March 1, 2021.

Form 1099-NEC

Beginning with tax year 2020, employers must use Form 1099-NEC to report nonemployee compensation. If the following four conditions are met, you generally must report a payment as nonemployee compensation:

  • You made the payment to someone who is not your employee.
  • You made the payment for services rendered in the course of your trade or business (including government agencies and nonprofit organizations).
  • You made the payment to an individual, a partnership, an estate or, in some cases, a corporation.
  • You made payments to the payee of at least $600 during the year.

Form 1099-MISC

Form 1099-MISC is still around. Reporting is required for payments of more than $600 in the course of your business for rents, prizes and rewards, gross proceeds paid to an attorney, fishing boat proceeds, medical and healthcare payments, and other various payments. You are required to use Form 1099-MISC for gross proceeds paid to attorneys (use Form 1099-NEC for attorney fees.)

Form W-9

An individual or business entity that is required to file an information return, such as a 1099, with the IRS must obtain the correct taxpayer identification number (TIN) of the recipient. The TIN could be a Social Security Number (SSN), Employer Identification Number (EIN) or another IRS-approved identification number.

Obtaining a signed Form W-9 from the recipient of the Form 1099 certifies the TIN provided is correct, and the 1099 recipient is not subject to backup withholding.

If reporting thresholds are not met, individuals or business entities are subject to backup withholding and must withhold 24% of nonemployee compensation. Individuals and business entities will not be subject to backup withholding on payments made if they obtain the payee’s correct TIN, and the payee makes the proper certifications via the Form W-9.

It is important to obtain a signed W-9 from all independent contractors to ensure you avoid penalties and backup withholding requirements.

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Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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