Tax & Accounting News

1099-NEC: Revised Tax Form Addresses Payments to Freelancers and Gig Workers

9/28/2020

The more things change, the more forms the Internal Revenue Service needs to reflect those changes. The latest revision to existing filing forms brings back a new version of an oldie but goodie: Form 1099-NEC Nonemployee Compensation, which has not been in circulation for nearly 40 years. Last used in 1982, Form 1099-NEC will now be dedicated to reporting nonemployee compensation such as that paid to independent contractors, freelancers, and other non-employees that are today referred to as gig workers, all of which had been reported on Form 1099-MISC, Miscellaneous Income in recent years.

The change does not mean that Form 1099-MISC is being eliminated. Rather, its use will be restricted to Section 409A deferrals, nonqualified deferred compensation income, and reporting gross proceeds to an attorney.

Reviving Form 1099-NEC

Here's the new form, which will be used for the 2020 tax season:

Not every business will be required to file a Form 1099-NEC, but if you answer yes to all of the following four questions, then you will need to:

Did you make a payment to somebody who is not an employee of your business?
Did the payments made to that entity total $600 or more during the course of the year?
Was the payment made to a sole proprietor, individual, partnership, estate or (in some instances) a corporation?
Was the payment that you made for services having to do with your business or trade (regardless of whether you are a for profit business, a nonprofit organization or a government agency)?

Why Are They Bringing Back the Form?

Adding another form to the already long list of existing forms may seem like just bureaucratic busywork, but the repurposed Form 1099-NEC makes a lot of sense in light of changes brought about by the Protecting Americans from Tax Hikes Act of 2015 (also known as the PATH Act.) That new law, enacted on December 18th of 2015, delayed the ability of taxpayers eligible for the Additional Child Tax Credit (ACTC) or the Earned Income Tax Credit (EITC) to get their tax refund until mid-February. The enforced delay was a response to a disparity in filing deadlines: while Form W-2s and other income forms such as the (now defunct) Form 1099-MISC had to be provided to taxpayers by January 31st, the same information did not need to be submitted to the government until much later. This gap extended from end of January to end of February for those submitting the forms in hard copy and from end of January to end of March for those filing electronically.

Regardless of which way the government versions were submitted, it opened a window of opportunity for fraud: taxpayers who submitted their tax forms immediately could conceivably submit incorrect information long before the government received the compensation information from their employers. By delaying the distribution of tax refunds, the agency gave itself a bit more time to check to make sure that they were not being duped.

Though the new PATH Act’s passage eliminated the deadline issue, employers also had to submit those same compensation forms to the Social Security Administration on the same schedule and deadline as was required for taxpayers, but because Form 1099-MISC was used for so many different types of compensation, the due dates for different purposes varied, again leaving the information needed for taxpayer refunds out of sync. By bringing back the Form 1099-NEC specifically for non-employee compensation and putting it on the right schedule, the IRS eliminated the problem.

Just One More Thing

Though the reintroduction of Form 1099-NEC specifically for nonemployee compensation was meant to clear up confusion, it created a new problem. The IRS had already released an updated version of Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, a guidebook that explains all of the requirements and deadlines for filing a long list of tax forms. The book also specifically addresses the Combined Federal/State Filing Program (CF/SF), which was created to allow tax preparers, businesses and taxpayers the ability to have the IRS share certain forms and information from approved filers with their state counterparts at no charge. It eliminated the separate step of submitting the following forms to the states that cooperate with the program:

Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
Form 1099-DIV, Dividends and Distributions
Form 1099-G, Certain Government Payments
Form 1099-INT, Interest Income
Form 1099-K, Payment Card and Third Party Network Transactions
Form 1099-MISC, Miscellaneous Income
Form 1099-OID, Original Issue Discount
Form 1099-PATR, Taxable Distributions Received From Cooperatives
Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 5498, IRA Contribution Information

A careful review of this list reveals the glaring omission of Form 1099-NEC, which is required by many states. Unfortunately, the form has not yet been incorporated into the CF/SF Program, so in 2021, when filing for tax year 2020, taxpayers will need to submit them to their state separately.

Prior Year Non-Employee Compensation Information Should Not Use New Form

Those who need to report nonemployee compensation from tax years prior to 2020 should not use Form 1099-NEC to do so. Prior year nonemployee compensation should be filed using the form that was appropriate at the time: Form 1099-MISC.

The Last Word

Though the intricacies of tax forms are generally not something that employers need to concern themselves with, the growing popularity of gig workers — especially during the COVID-19 pandemic — makes this information pertinent for tax preparers beyond the professional corp. The information is also helpful for the gig workers themselves, who will need to understand why they are getting a different form this year than in years’ past. This year you should receive Form 1099-NEC from your clients no later than February 1st.

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Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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You agree that: (i) the Website shall be deemed solely based in California; and (ii) the Website shall be deemed a passive website that does not give rise to personal jurisdiction over Taxbuzz or CountingWorks, Inc., either specific or general, in jurisdictions other than California. These Terms and Conditions shall be governed by the internal substantive laws of the State of California, without respect to its conflict of laws principles. Any claim or dispute between you and Taxbuzz that arises in whole or in part from the Website shall be decided exclusively by a court of competent jurisdiction located in Los Angeles County, California. These Terms and Conditions, together with the Privacy Policy at https://www.taxbuzz.com/t/privacy and any other legal notices published by Taxbuzz on the Website, shall constitute the entire agreement between you and Taxbuzz concerning the Website. If any provision of these Terms and Conditions is deemed invalid by a court of competent jurisdiction, the invalidity of such provision shall not affect the validity of the remaining provisions of these Terms and Conditions, which shall remain in full force and effect. No waiver of any term of this these Terms and Conditions shall be deemed a further or continuing waiver of such term or any other term, and Taxbuzz's failure to assert any right or provision under the Terms and Conditions shall not constitute a waiver of such right or provision. YOU AND TAXBUZZ AGREE THAT ANY CAUSE OF ACTION ARISING OUT OF OR RELATED TO THE WEBSITE MUST COMMENCE WITHIN ONE (1) YEAR AFTER THE CAUSE OF ACTION ACCRUES. OTHERWISE, SUCH CAUSE OF ACTION IS PERMANENTLY BARRED.
Liability Limitation and Usage Guidelines for TaxBuzz Ai:
Limitation of Liability:

TaxBuzz Ai is a tool designed to provide tax professionals with assistance in generating responses to tax research questions. While we strive to maintain the accuracy and reliability of the information provided, it is imperative to recognize that tax laws are dynamic and subject to change. Therefore, the use of TaxBuzz Ai should be complemented by professional judgment and consultation with legal and tax experts.

By utilizing TaxBuzz Ai, you acknowledge and agree that the information generated should not be considered as a substitute for professional advice tailored to your specific circumstances. We explicitly disclaim any liability for the consequences arising from the use of advice generated by TaxBuzz Ai. Users are encouraged to independently verify the information and seek professional advice before making decisions based on the Ai-generated responses.

Usage Guidelines:
- Professional Judgment: TaxBuzz Ai is a tool to aid tax professionals in research and analysis. It is not a replacement for professional judgment, and users should exercise their expertise when interpreting and applying the information generated.
- Consultation with Experts: While TaxBuzz Ai provides valuable insights, it is crucial to consult with legal and tax experts to ensure the advice aligns with the latest legal developments and specific nuances of a particular situation.
- Verification of Information: Users are responsible for independently verifying the information provided by TaxBuzz Ai, especially in instances where the advice generated is critical to decision-making.
- Educational Purposes: TaxBuzz Ai is intended for educational and informational purposes only. It is not intended to provide specific legal or tax advice tailored to individual circumstances.
- Non-Endorsement: The use of TaxBuzz Ai does not constitute an endorsement or guarantee of the accuracy of the information provided. Users are encouraged to corroborate the advice with other reliable sources.
By accessing and using TaxBuzz Ai, you agree to abide by these terms and acknowledge the limitations outlined herein. We reserve the right to modify these terms at any time, and your continued use of TaxBuzz Ai constitutes acceptance of any such modifications. If you do not agree with these terms, please refrain from using TaxBuzz Ai.

TaxBuzz.com is a service of CountingWorks, Inc., 2549 Eastbuff Drive., #448 208, Newport Beach, CA 92660

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