Companies making payments to self-employed contractors used to file Form 1099-NEC. That form was done away within 1983 after Box 7 was added to the 1099-MISC form. The latter form is the form companies have been using to report non-employee compensation (NEC) for the last 36 years. That changes in 2020. Yes, the 1099-NEC is making a comeback.
BenefitMall, a nationwide payroll and benefits administration provider based in Dallas, explains that employers will still issue 1099-MISC forms this year to cover NEC payments made in 2019. Any payments made from 2020 forward will be reported on the new form.
The IRS issued a draft form in late summer 2019. The form has two parts, Copy A and Copy B. It should be noted that both parts can be downloaded from the website, but Copy A cannot be used to file with the IRS as it is not scannable. Anyone wishing to use the Copy A must obtain a paper copy from a local IRS office. Copy B can be downloaded, printed, and used to file.
Why the Change Was Made
Government officials decided to move away from the 1099-NEC in 1983 as a means of streamlining tax filing. By adding Box 7 to the 1099-MISC, the IRS was able to eliminate both an extra form and the required steps to complete it. That has changed due to concerns over fraud.
Said fraud is the direct result of a loophole in the law regarding 1099-MISC forms. According to the law, employers furnishing the forms to independent contractors for NEC have to file those forms and have them in the contractor’s hands by January 31. If the forms are used to make any other kind of income, the January 31 date is not applicable. Other types of income do not have to be reported until the end of February or March.
This loophole gives fraudsters the ability to file fraudulent tax returns throughout February and March while legitimate taxpayers wait on their 1099-MISC forms. By requiring the 1099-NEC instead, that loophole is eliminated.
Only Non-Employee Compensation Changes
It is worth noting that only NEC payments are affected by the new form. All other forms of income reported on the 1099-MISC remain the same. With the change, the IRS and SSA will have NEC information in their systems by the end of January, thus reducing the likelihood of a fraudulent tax return by someone claiming to be an independent contractor.
BenefitMall says that the new 1099-NEC is a short and simple form. It should not require a tremendous amount of effort to complete. Companies that handle payroll in-house should check with software vendors to see if an update is forthcoming this year. If not, they should be pressing for such an update.
Companies that outsource payroll to a third-party should check with that service provider to ensure they are up to date on the change. It is assumed they will be, but it never hurts to check. Payroll providers like BenefitMall will likely be updating their own systems in the coming months.
Also, note that the change in forms does not change the fact that the IRS expects employers to classify their employees correctly. If there is ever a question of whether or not a worker meets the requirements for being classified as an independent contractor, the IRS website offers some guidance.
In closing, expect a 1099-NEC form next January if you receive any NEC as an independent contractor. You will report that form and its contents on your 2020 tax return filed sometime after January 31 of next year.