For the 2020 year, the IRS introduced the new Form 1099-NEC (Nonemployee Compensation) for reporting independent contractor income.
Form 1099-NEC (which you can see here) is specifically for payments to individuals, not on payroll. It is for contract work that generally includes independent contractors, gig workers, or anyone who is self-employed who previously had their payments reported in Box 7 of the Form 1099-MISC. Businesses are required to file the Form 1099-NEC for any individual who was paid more than $600 in a tax year (unless the individual is registered as a C- or S-Corp).
With the introduction of the 1099-NEC, the 1099-MISC will still be applicable and will be dedicated mainly to reporting miscellaneous income. Individuals or LLCs who were paid at least $600 during the year in rent paid, legal settlements, or prize/award winnings are required to have a 1099-MISC filed on their behalf.
Below are some deadlines to keep in mind:
1099-NEC: January 31st, 2021
1099-MISC: March 1st, 2021 (if filed by paper)
1099-MISC: March 31st, 2021 (if filed electronically)
1099 Best Practices to Kickstart 2021
The January 31st deadline for vendors and the IRS to receive a copy of Form 1099-NEC is fast approaching. Many organizations tend to perform a 1099 analysis after the tax year ends. This gives organizations only a month to perform the 1099 analysis, gather correct information, and send it to the IRS.
To avoid any letters from the IRS due to not reporting or incorrectly reporting social security numbers or tax identification numbers (TINs), attention to detail and completeness are crucial. However, gathering information from 1099 vendors can be time-consuming and frustrating as sometimes vendors provide erroneous TINs. Organizations are liable for any taxes that were supposed to be deducted and withheld. This makes 1099 planning even more necessary than ever.
What can organizations do to prevent errors in completing form 1099? Here are five recommended steps to prepare for a better managed 1099 experience:
Determine whether the independent contractor is truly an independent contractor or an employee.
Provide a contract to the independent contractor. In NYC, the Freelancers Act requires any services over $800 to be written in a contract with the responsibilities or deliverables outlined, the duration, when payment will be made, and how much they will be compensated.
Gather correct business or personal information when sending out the contract to the independent contractor. Have the contractor complete a W-9 or a W-8BEN (for foreign contractors). If you decide to pay them without getting a W-9 or a W-8BEN, the organization may be responsible for withholding 24% of the payment, as per IRS section 3406(a).
Sync the 1099 data to your accounting system. Work with your accounting team to have the business information or personal information, including TIN, entered into the accounting system or system used to pay the independent contractors. This step will help the accountants with the year-end 1099 analysis by reducing the time spent reaching out to vendors or office personnel for W-9s or W-8BEN. Additionally, it will make the 1099 reporting flow more smoothly.
Verify the mailing address. Determine which independent contractor may need a scheduled call or email during the tax year. For example, a graphic artist is more likely to move around than a corporation. You can include an address verification with a payment or have the individual submit an invoice with address, TIN, phone, and email.
Following the above steps will enable you and your team to have a better 1099 experience and minimize IRS letters and Department of Labor audits. Please connect with your accounting or HR advisor for any additional questions.