Have Independent Contractors? Learn about Important Changes to Form 1099-MISC
Businesses, small and large, ranging from an Airbnb residence operated as business to big tech corporations are required to issue 1099 forms to their independent contractors for payments of $600 or more made during the year. For small businesses it can be a struggle, especially in the first few years of operation, until they have a solid system in place for collecting all the important information in advance to timely file forms 1099s.
Before discussing the important changes made to the form in 2020, let’s go over some of the reminders that can make your business life much easier during the tight reporting period.
1. When onboarding a new vendor, ask them to complete Form W-9. I would recommend against exempting anyone from filling out the form as you need a clear written record for your files.
a. Please review the form for accuracy making sure all pertinent boxes are checked and the form is properly signed.
2. Please consider signing up for the IRS TIN Matching Program. It allows you to verify instantly a taxpayer identification number (TIN) provided by your vendor to avoid matching notices and potential penalties (for reasonable cause). Here is the link to the program: https://www.irs.gov/tax-professionals/taxpayer-identification-number-tin-matching.
a. If using the program, please create a written policy/procedures on how it is used by your business.
3. Preferably you will not make a payment to your vendor until you have the completed Form W-9 on file. It is much more difficult to obtain the form after the fact.
4. Even though corporations are generally exempt (there are some exceptions) from receiving a 1099, I would still recommend having the completed W-9 from them on file even if their name contains ‘Inc.’.
5. Attorneys/law firms, even if incorporated, are to receive 1099s if their fees for the year are $600 or more. From my experience, this is one of the most often missed 1099s.
6. Watch out for non-US vendors (their EINs normally start with 98) for whom you may need to get a W-8 or Form 8233 to determine if withholding is required and if Forms 1042 are to be filed instead of 1099s.
As for the changes to the Form 1099-MISC, starting with 2020 tax year, you will no longer use box 7 of Form 1099-MISC to report non-employee compensation. Instead, Form 1099-NEC will be used for reporting payments to independent contractors of $600 or more. Some important considerations for the new form are listed below:
- Your independent contractors include individuals, partnerships (LLCs), estates, attorneys, and in some cases, corporations.
- Payments covered by the form are for services as well as parts and materials used in conjunction with those services.
- 1099-NEC’s filing deadline with the IRS is January 31, 2021 which is different than the March 31, 2021 deadline for electronically filed 1099-MISC.
- There is NO automatic 30-day extension for Forms 1099-NEC.
- Unlike Form 1099-MISC that is subject to combined federal/state reporting which allows you to file 1099-MISC only once, Form 1099-NEC is to be filed separately with the IRS and your state tax authority as forms 1099-NEC are excluded from combined reporting.
- Many payroll providers are not yet up to speed with filing those forms electronically. Filing these forms seems to be more costly too.
What it means for you as a business owner: start preparing now.
- Review your W-9 records for your independent contractors for accuracy.
- Apply to IRS TIN Matching Program for TIN verification.
- Contact your payroll provider to see if they will be ready to file those new forms on your behalf.
- If they are not, have a back up plan including requesting the forms from the IRS in advance to file on paper (as long as you are not required to file them electronically).
- Have a plan on how to file these forms with your state.
This article is not intended to cover all points related to filing Form 1099-MISC or Form 1099-NEC as many of the changes are beyond the limited scope of this article.