Reporting Non-Employee Compensation: A Year of Change
The New Form 1099-NEC Changes Non-Employee Compensation Reporting Requirements
The IRS has made significant changes as to how non-employee compensation must be reported. In the past, compensation of $600 or more paid to non-employees for services in the course of a trade or business was reported on the Form 1099-MISC. But, compensation of $600 or more paid to non-employees in 2020 and subsequent years is now required to be reported on the Form 1099-NEC. All organizations — including government agencies — that hire independent contractors should take note of this change because it affects how compensation is reported.
The following are the four general requirements that now indicate whether a payment must be reported on the Form 1099-NEC:
- The payment is made to a non-employee
- The payment is made in the course of a trade or business for services
- The payment is to an individual, partnership or trust
- The amount paid during the year is $600 or more
Like the Form 1099-MISC, payments made to corporations generally are not required to be reported on the Form 1099-NEC. One important exception to this rule, however, are attorneys’ fees paid to corporations for services. These fees must be reported on the Form 1099-NEC. Amounts paid to attorneys and law firms — even those organized as corporations — that are not for services (e.g., settlements) are still reported on Form 1099-MISC.
Notably, unlike the Form 1099-MISC, which must be filed by March 1, 2021 for paper filings or March 21, 2021 for electronic filings, the Form 1099-NEC must be filed by Feb. 1, 2021 for both paper and electronic filings. The statement is also due to the recipient of the payment on Feb. 1, 2021. The typical due date for filing the Form 1099-NEC and providing a copy to the payment recipient is Jan. 31 of the following year, but Jan. 31 falls on a Sunday in 2021. Further, beginning in 2021, the automatic 30-day extension is eliminated. But, if certain hardship conditions are met, an extension may be available. Sizeable penalties apply if the Form 1099-NEC or the recipient statements are not timely filed or are filed with incorrect information.
Prior to paying compensation for services to a non-employee, the payor must request the non-employee’s taxpayer identification number. For non-employees that are “U.S. persons,” this information should be requested using the Form W-9 or suitable substitute containing the information required by the IRS. For such purposes, the term “U.S. person” includes: U.S. citizens; U.S. resident aliens; partnerships, companies and corporations organized in the U.S.; non-foreign estates; and domestic trusts. If the non-employee receiving compensation for services does not return the Form W-9, a $50 penalty applies, and the compensation payment will be subject to backup withholding. Backup withholding means that a portion of the non-employee compensation must be withheld and paid to the IRS by the payor. The backup withholding rate is currently 24 percent and the amount of backup withholding is reported in Box 4 of the Form 1099-NEC.
The Form 1099-NEC is used to report payments of compensation to non-employees for services rendered in the course of a trade or business, but where payments to non-employees are not for services they generally must be reported on Form 1099-MISC. For example, payments for rents, royalties and payments to non-corporate vendors exclusively for goods. In sum, the new Form 1099-NEC applies only to payments made in the course of a trade or business to non-employees for services rendered. All other non-wage payments normally reported on Form 1099-MISC should continue to be reported on Form 1099-MISC.
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