January is just around the corner and with it comes the beginning of a new annual information reporting cycle. For small businesses accustomed to using Form 1099-MISC to report nonemployee compensation, there are important changes that you should be aware of when reporting nonemployee compensation for the 2020 tax year.
Prior to the 2020 tax year, nonemployee compensation was required to be reported in Box 7 of the 1099-MISC. Starting this year, nonemployee compensation is reported on its own form: 1099-NEC.
Nonemployee compensation is required to be reported on Form 1099-NEC for each person who received a payment for $600 or more for:
Services performed by someone that is not your employee (including parts and materials)
Cash payments for fish you purchase from anyone engaged in the trade or business of catching fish
Payments to an attorney
Although this new form does represent a change in how miscellaneous compensation is reported, the good news is that the form itself is rather simple. The dollar amounts for the three types of compensation described above that are required to be reported on the 1099-NEC are all reported in Box 1. The only other dollar amounts reportable on the form are federal income tax withheld in Box 4, state tax withheld in box 5, and state income in Box 7.
The amounts reported in Box 1 of Form 1099-NEC were previously reported on Form 1099-MISC in Box 7 (nonemployee compensation and cash payments for fish) and Box 14 (payments to an attorney) for tax years prior to 2019.
Boxes 7 and 14 on the 1099-MISC are now for direct sales of $5,000 or more of consumer products to a buyer for resale (Box 7) and nonqualified deferred compensation (Box 14). Whether preparing the forms in-house or using a third party, it is important to double check the amounts reported on any 1099-MISC forms this year to ensure the amounts are reported for those categories and not the pre-2020 categories.
Form 1099-MISC should be filed for each person in your business who paid the following during the year:
At least $10 in royalties (see the instructions for Box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for Box 8).
At least $600 in:
Rents (Box 1);
Prizes and awards (Box 3);
Other income payments (Box 3);
Generally, the cash paid from a notional principal contract to an individual, partnership, or estate (Box 3);
Any fishing boat proceeds (Box 5);
Medical and health care payments (Box 6);
Crop insurance proceeds (Box 9);
Section 409A deferrals (Box 12); or
Nonqualified deferred compensation (Box 14).
Form 1099-NEC for the 2020 tax year is required to be delivered to the IRS and the payee by January 31, 2021. Employers must furnish Form 1099-MISC to the payee by January 31, 2021 and must file the return with the IRS by February 28, 2021.
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