SPECIAL ALERTS

Understanding The New Rules For 1099 Forms

1. 1099-NEC vs. 1099-MISC. Which form should you use?

1099-NEC is a new form, as of the 2020 tax reporting year, that has replaced some of the functions of 1099-MISC. In short, use 1099-NEC to report nonemployee compensation payments totaling $600 or more made to non-corporations. This covers the information formerly in box 7 of 1099-MISC. Still, determining which form to use and when could be a little tricky.

It’s important to understand what each form is used for, and when they’re due.

Notice: Now is the time to start preparing your 1099 forms. Why? Because the 1099 process for 2021 will be more complicated than ever.

2. 1099 Compliance: New Rules, New Filing Requirements & New IRS Scrutiny

The new Biden Tax Increase bill substantially impacts small business, employers and individuals. One of the aspects of the new tax bill is to increase IRS audits and collections by hiring 10s of thousands new IRS employees, auditors, and tax collectors. Expect more audits. As a result, you need to accurately report tax matters or severe penalties will result.

3. 1099-NEC is used primarily for contractors

Form 1099-NEC is for reporting payments of $600 or more made to nonemployees who don’t do business as corporations. This information used to go in Box 7 of Form 1099-MISC, but starting with 2020 earnings the IRS now wants it captured on Form 1099-NEC. This primarily impacts businesses that work with independent contractors and freelancers who do business as non-corporate entities. That includes self-employed workers, sole proprietors, partnerships, and limited liability companies.

Copy A and B of Form 1099-NEC are both due to the IRS and recipients by February 1st, whether filed by paper or electronically. This is different than most forms, which have later dates and online filing extensions.

It is important to properly identify workers. For example, housekeeping staff may work for a corporate entity, but they also may be in business for themselves. The latter would require form 1099-NEC, while the alternative would not. It’s important not to make assumptions. Simply saying “company” on a business card or website does not mean they’re a corporate entity. If you’re uncertain, ask the contractor. You could also request a Form W-9 from them to confirm what type of business entity they are. Finally, when in doubt, you’re better off sending the forms unnecessarily than not filing them if they were in fact needed.

4. 1099-MISC covers miscellaneous income

You’ll still use 1099-MISC to report a variety of types of miscellaneous income including payments made for rent, prizes and awards, and medical payments.

File Form 1099-MISC for each person to whom you have paid during the year:

At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
At least $600 in:
Rents.
Prizes and awards.
Other income payments.
Medical and health care payments.
Crop insurance proceeds.
Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
Payments to an attorney.
Any fishing boat proceeds.

In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

Copy A of 1099-MISC is due to the IRS by March 1st if filing by paper, or March 31st if filing electronically. Copy B is due to recipients by February 1st. However, there are two exceptions. 1099-MISC is due to the recipient by February 15st instead of February 1st if it includes:

Substitute dividends and tax-exempt interest payments reportable by brokers of $10 or more.
Gross proceeds paid to attorneys of $600 or more.

Don’t forget:

The IRS hasn’t entirely eliminated the old Form 1099-MISC, which means you may have two different sets of 1099s to file. (And it’s still not clear yet whether Form 1099-NEC will be incorporated into the IRS’ combined filing program, which alleviates you from having to file the same form with the states.)

Plus, the IRS has rolled out extensive new e-filing requirements that change the way you count 1099s to determine whether you’re a mandatory e-filer. These requirements also drop the mandatory e-filing threshold substantially … and quickly. Also, employers are facing intense new scrutiny of their 1099s from the IRS – and forms filed in the wrong medium (even correct forms!) can trigger millions of dollars in tax penalties.

Get in compliance with the new form and keep your 1099s on track.

5. File 1099s correctly and on time to avoid penalties

You may want to start on this process early this year, as any confusion or misfiled forms could result in penalties. With form 1099-NEC added to the mix, leaving yourself a bigger lead time to double-check your filings and correct any errors could save you from having to pay later.

Penalties may apply:

If you fail to file timely.
If you fail to include all information required to be shown on a return.
If you include incorrect information on a return.
If you file on paper when you were required to file electronically.
If you report an incorrect TIN.
If you fail to report a TIN.
If you fail to file paper forms that are not machine-readable and applicable revenue procedures provide for a machine-readable paper form.

Penalties increase the longer you wait to correct them.

If you realize you made a mistake, it’s important to address it as quickly as possible to avoid paying increased fees.

The penalties are as follows:

$50 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $565,000 per year ($197,500 for small businesses).
$110 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,696,000 per year ($565,000 for small businesses).
$280 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,392,000 per year ($1,130,500 for small businesses).

About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.

Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:

Estate Planning & Administration
Asset Protection Planning
Tax Planning, Tax Debt Resolution and Tax Litigation
Business & Corporate Law and Planning
Real Property Law & Planning

As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.

Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.

Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).

*Equivalent

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