The IRS is moving Non-Employee Compensation reporting, previously 1099 MISC-box 7, to a new form called the 1099-NEC. This change takes effect for the 2020 tax year, so reports filed in 2021 and later will need to utilize the new form if filers meet any of the following conditions:
- Have more than $600 in payments for services to an individual who is not an employee
- Have $600 or more in cash proceeds from fishing
- Have paid $600 or more to an attorney
- Have withheld federal income tax for any individual under the backup holding rules regardless of the payment amount.
The new form will contain only seven boxes. Box 1 will be for non-employee compensation. Box 4 will report federal withholding. Boxes 5, 6, and 7 will detail state tax withheld, payer state ID number, and state income respectively.
The 1099-MISC form will also be reorganized to accommodate the change, with boxes 7-17 being shifted to fill the gap where non-employee compensation was previously reported.
According to Tax Pro Today, some have criticized the IRS’s decision to make this change, citing the current Coronavirus pandemic as potential reason to delay the launch of the new form. Since accounting departments and bookkeepers are detailing with an increased volume of work due to financial struggles amidst the pandemic and maintenance related to small business loans, disability for employees, and paid leave for those who are caring for loved ones due to school closures or sickness, the worry is that this change will place additional undue pressure on financial professionals.
In addition, there are uncertainties surrounding current tax software’s ability to flag vendors as 1099-NEC, which may make it difficult to differentiate vendors who need to go on the NEC vs. MISC forms come next tax season. While inserting a display name flag may mitigate this issue, it is an extra step for accounting departments to take when maintaining financial records for the current fiscal year. If this applies to your business, you may wish to reach out to the support team for your bookkeeping software and ask about their plans for adding a 1099-NEC flag.
There was originally also some concern over how to process corrections for prior year 1099-MISC forms since Box 7 will no longer exist in its previous form. However, the IRS has since stated that corrections to 1099-MISC box 7 for tax years 2019 and earlier will remain on the old document.
Individual states do not yet have requirements for the 1099-NEC. Many are hoping that the IRS will make the form part of the Combined Federal/State program to streamline the process. IRS representatives have disclosed that this decision will be made by the end of August 2020. State requirements will likely be announced late this year to accommodate the 1099-NEC’s February 1, 2021 due date.
