1099-NEC – Prepping for Year-End in the Middle of the Year

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By Erica Kasper

Content Marketing Manager

Form 1099-NEC is new for the 2020 tax year. This form is used to report non-employee compensation and takes the place of box 7 on the previous Form 1099-MISC. While Form 1099-NEC may seem unfamiliar at first, it has a long history that outlines why it was discontinued and how it came to be brought back after several decades without it.

Where did the 1099-NEC come from?

Form 1099-NEC was a standard tax form until 1982. At that time, it was a simple, straightforward way to report non-employee compensation that totaled more than $600 for the calendar year. For tax year 1983, the 1099-NEC was eliminated, and the information reported on it was moved to Form 1099-MISC. That is how non-employee compensation has been reported for more than three decades: as one of many boxes on the 1099-MISC. It’s important to note that the 1099-MISC has long been the form used to report a variety of income types, including royalties, rents, and income earned by self-employed fishing boat operators.

What changed to bring the 1099-NEC back into use?

After Congress passed the Protect Americans from Tax Hikes Act of 2015 (PATH Act) and the IRS revised the filing deadlines in 2017, using the 1099-MISC was more complicated that it had previously been. For those filing a 1099-MISC without non-employee compensation, the deadline to file was February 28. But for those filing a 1099-MISC with non-employee compensation reported, the filing deadline was moved up to January 31. Having one form with two different filing deadlines created a great deal of confusion and frustration for filers. The IRS tried to mitigate the problems that arose by adding a new line to Form 8809, the Application for Extension of Time to File Information Returns. That line was explicitly created to extend the filing deadline for 1099-MISC forms with non-employee compensation reported. The fix worked to a point, but it didn’t address the underlying issues with the multiple filing dates.

The next action the IRS took to correct the problem was for tax year 2018, when they began to require separate filing of 1099-MISC forms, once for inclusion of non-employee compensation and once without it. At this point, filers were basically submitting non-employee compensation separately, but the procedure was to file the same form twice. This, too, created confusion. The logical final step was to bring Form 1099-NEC back into circulation and take non-employee compensation off Form 1099-MISC entirely, which is what has happened for tax year 2020.

The need for Form 1099-NEC arises from more than just the problems with the previous system. According to Fast Company (https://www.fastcompany.com/3051073/heres-how-many-gigs-are-in-the-gig-economy), the number of 1099-MISC forms submitted has been on the rise; 91 million 1099-MISC forms were received by the IRS in 2015, up from 82 million five years before. This is due in part to the growth of the “gig economy,” in which an increasing number of workers are independent contractors earning non-employee compensation. These workers include hair stylists, rideshare drivers, graphic designers and tutors, among other roles. The increase in non-employee workers has led to a greater need for a form that’s clean, straightforward and unlikely to cause confusion around filing deadlines so that “gig” income can be reported accurately as that segment of the economy continues to grow.

Why Learn About Form 1099-NEC Now?

This year has brought a variety of new and unexpected challenges to the income tax landscape. The impact of COVID-19 has led to new laws like the Family First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), and a plethora of new guidelines for managing wages, retaining employees and handling sick leave. Those who are tasked with paying employees and non-employees alike must meet the challenge of keeping up with the latest changes and filing the correct forms on schedule. Now is a good time to become familiar with new forms like the 1099-NEC that will be an important part of the filing process for tax year 2020, especially since it’s difficult to predict what additional changes are on the horizon for the remainder of the year.

What’s next?

The filing deadlines for the new forms have already been tentatively set. As of now, Form 1099-NEC must be filed on or before February 1, 2021. This deadline applies for both paper and electronic filing methods. Form 1099-MISC must be filed on or before March 1, 2021, if the filing is on paper, and on or before March 31, 2021, if filed electronically. These separate dates should clear up any confusion that arose in previous years. Draft copies of the new 1099-NEC and 1099-MISC are currently available on the IRS website, but the forms have not yet been formally adopted, and the IRS notes that draft forms often have changes before they are finalized.

The introduction of Form 1099-NEC will have broad implications for filers. In order to be prepared for the new forms, businesses must now be sure to keep non-employee compensation data separate from other 1099-MISC data. According to Intuit (https://turbotax.intuit.com/tax-tips/irs-tax-forms/a-guide-to-commonly-used-irs-tax-forms/L7YJv3Sbh , 1099 forms are among the most commonly used IRS forms, and non-employee compensation is a major reason for that. Now that non-employee compensation will have its own form, the 1099-NEC promises to be one of the most widely used forms almost immediately.

Of course, each individual state will also have to adjust to the new 1099-NEC depending on how much of the state’s regulation was based on the non-employee compensation listed on the previous Form 1099-MISC.  

To read the IRS instructions for both the 1099-MISC and the 1099-NEC for 2020, as well as links to the latest updates, click here: https://www.irs.gov/instructions/i1099msc

To see a draft copy of the new Form 1099-NEC, click here (note: this is a draft copy only and is not for filing): https://www.irs.gov/pub/irs-dft/f1099nec–dft.pdf To see a draft copy of the new Form 1099-MISC with the non-employee compensation box no longer present, click here (again, this is a draft copy only and is not for filing): https://www.irs.gov/pub/irs-dft/f1099msc–dft.pdf