The IRS has created a new form, 1099-NEC, to report payments for nonemployee compensation for the 2020 tax year. Nonemployee compensation is the only information reported on the new form, and it is due to both the recipients and the IRS by February 1, 2021 (regardless of the filing method). The nonemployee compensation box (box 7) on the 1099-MISC has been removed. All other boxes remain the same on the 1099-MISC.
The following are key points to consider when preparing your Form 1099:
Who Receives a Form 1099?
Form 1099 should be issued to the following entity types:
- Individuals and sole proprietors
- LLCs taxed as a partnership
- Single-member LLCs
Form 1099 does NOT need to be issued for the following entity types:
- C corporations
- S corporations
- LLCs taxed as either C or S corporations
It is recommended companies receive completed W-9s from all vendors when they first start using the vendors. This will help them gather the appropriate information and save them from scrambling in January to get the necessary info. It may also help reduce matching notices later from the IRS.
How to Prepare a Form 1099-MISC, 1099-NEC, or 1098
In order to prepare Form 1099-MISC or 1099-NEC, you must include the following information:
- Full legal name of the entity or individual
- Federal ID number or social security number (NOTE: if dealing with a single-member LLC which has a FEIN, you must use the legal LLC name and the FEIN, rather than the individual name and SSN)
- Current mailing address
- Amount paid to recipient in 2020 and what type of payment (i.e. rent, non-employee compensation, etc.)
In order to prepare Form 1098, the following must be included:
- Full legal name of the individual
- Social security number
- Current mailing address
- Mortgage interest received from payer/borrower
- Outstanding mortgage principal as of 1/1/2020 (if originated in 2020, mortgage principal as of date of origination)
- Mortgage origination date
- Address of property securing the mortgage
Which Payments are Included or Excluded?
Form 1099 should be issued for payments of $600 or more in connection with services provided during the course of a trade or business and should not be issued for purchases of products. It should also be issued for payments of rent.
Form 1099 should be issued for the payment of legal services, regardless of the type of entity (i.e. includes legal providers which are incorporated – this is the only exception to the entity type rule).
The following payments should NOT be included in Form 1099:
- Expense reimbursements
- Amounts paid to vendors via credit or debit card (these will be included in the 1099-K provided by the credit card processing company)
All 1099 and 1098 forms EXCEPT 1099-NEC must be filed with the IRS by March 1, 2021 (if paper filing) or March 31, 2021 (if electronically filing) in order to be considered timely. If Form 1099 is not filed by the appropriate due date, you may be subject to penalties for late filing. These penalties range from $50 per statement (for up to 30 days late) to $270 per statement (if filed after August 1). The penalty for intentional disregard is $550 per statement.
For questions regarding the new Form 1099-NEC, please contact us today.Categories: Tax, Small Business, Tax Planning