While not as wondrous as witnessing the birth of a baby or a star, we in the tax information reporting world are welcoming a new Form 1099-NEC into the 1099 reporting series of information returns this year. The new Form 1099-NEC will be used to report nonemployee compensation and is effective for payments made beginning January 1, 2020 (so, yes, this year). As with all changes, this will require an adjustment to our daily routines – involving not only mapping nonemployee compensation payments to the new form but also adjusting income mappings to a modified version of the existing Form 1099-MISC where nonemployee compensation has heretofore been reported.
First, here are a few tidbits relating to new Form 1099-NEC. The form is to be used to report nonemployee compensation – which includes, for example, payments to independent contractors for services rendered. Such vendor payments would generally have been reported on Form 1099-MISC Box 7. Thus, one of the process changes that will need to be attended to is that Form 1099-MISC Box 7 payments should now be mapped to new Form 1099-NEC Box 1.
Part of the rationale for the new Form 1099-NEC is that the PATH Act of 2015 accelerated the deadline for reporting nonemployee compensation from the usual Form 1099-MISC deadline of February 28 following the payment year for paper returns (and March 31 for electronic filing) to January 31. This has resulted in confusion over deadlines and potential late-filing penalties (the same Form 1099-MISC could have a January 31 and/or February 28 (or March 31) deadline depending on type of reportable income payments. The new Form 1099-NEC was introduced (or re-introduced) to alleviate the confusion over the differing deadlines.
Given that January 31, 2021 falls on a Sunday, the first deadline for Form 1099-NEC for 2020 payments will be February 1, 2021. The new version of Form 1099-MISC (which will no longer include nonemployee compensation) would follow the February 28 (March 1 for 2021 since February 28 also falls on a Sunday) or March 31 filing deadline for paper and electronic returns, respectively. (Note that these 1099-MISC deadlines refer to IRS return filing deadlines and that statements to recipients – the actual payees – must be filed earlier.)
But looking to the future might always require a bit of introspection. In updating processes to address new Form 1099-NEC, it may also be an opportune good time to review whether income is being mapped correctly within the existing Form 1099-MISC framework. For example, some firms may be reporting all payments to attorneys on Form 1099-MISC Box 14 (Gross Proceeds Paid to an Attorney). But Box 14 is generally not used if an attorney is simply paid a fee by a payor for services rendered for the payor. Rather, such payments should generally have been treated as nonemployee compensation reported on Form 1099-MISC Box 7. Box 14 might apply to something like a settlement payment that is being routed to the attorney in question. Another example might be swap payments that is mapped to Box 7 instead of Box 3 (Other Income). In either case, such errors in mapping could mean not only a wrong form type in next year’s reporting but an erroneous due date.
Beyond erroneous mappings, the birth of Form 1099-NEC also impacts payment reporting on the Form 1099-MISC for other payment types outside of nonemployee compensation since certain of the boxes on Form 1099-MISC have changed due to the removal of nonemployee compensation from Box 7 of the current form. In particular, Box 7 now contains the checkbox for $5,000 or more of direct sales, crop insurance proceeds are reported in Box 9, gross proceeds to an attorney are now reported in Box 10, section 409A deferrals reported in Box 12, nonqualified deferred compensation income is reported in Box 14 and Boxes 15, 16 and 17 report information for state tax purposes (Box 18 is removed). Fortunately, for brokers that may use Form 1099-MISC for substitute payments, swap income or royalties, those boxes remain Box 8, Box 3 and Box 2, respectively, and have not changed.
Finally, filers of Form 1099-NEC need to monitor how states are handling this change in federal tax forms, including whether the states would adopt new forms or procedures to accommodate the 1099-NEC federal reporting. On this front, discussions among practitioners earlier this year indicated that Form 1099-NEC may not be included as part of the FIRE combined federal and state filing program. Thus, understanding state-level requirements for 2020 NEC payments will be especially important.
The new Form 1099-NEC is not a major change – one income payment type is moved from one form to another. But nonetheless, payors will need to think through the various process shifts that may be required to accommodate the new entrant into the 1099 reporting world.