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January 2021

Forms 1099 Changes: What you need to know

By Jim Smith, CPA-Dallas

 

There are many types of 1099 forms. Some of the most common are:

1099-B (Gross Broker Proceeds)

1099-DIV (Dividends)

1099-G (Certain Government Payments)

1099-INT (Interest)

1099-K (Payment Card and Third-Party Network Transactions)

1099-MISC (Miscellaneous)

1099-NEC (Non-employee Compensation)

1099-OID (Original Issue Discount)

1099-PATR (Patronage Dividends)

W-2G (Certain Gambling Winnings)

This discussion will focus on Forms 1099-NEC and 1099-MISC. 

 

Form 1099-NEC (Non-employee Compensation)

This is the biggest change! Amounts that were formerly reported in Box 7 of Form 1099-MISC are now reported in Box 1 of this form. 

Who gets one? 

  • Generally, non-employee service providers who are paid $600 or more in the course of a trade or business during a calendar year. 
  • ALL legal fees, even if under $600.
  • Oil and gas working interest payments.

This is not an all-inclusive list. Additional information can be found in link below, Instructions for Forms 1099-MISC and 1099-NEC.

When are they due? Your 1099-NEC forms must be filed this year by Feb. 1, 2021, accompanied by a transmittal Form 1096.

 

Form 1099-MISC (Miscellaneous)

Who gets one? The following non-employee payees who are paid $600 or more in the course of a trade or business during a calendar year:

  • Payees who receive rent, including equipment rental and surface royalties. Exception: If you pay rent to an agent of the owner, such as a management company, they do not prepare a 1099-MISC.
  • Payees who receive royalties, such as literary rights, copyrights, licensing fees and mineral royalties.
  • Payees who receive other payments. The most common are recipients of prizes and awards (but NOT employees), a deceased employee’s wages paid to an estate or beneficiary, payments for participation in medical research, payments to informants and taxable legal damages/settlements.
  • Payees who provided medical services, including veterinary services (NOT equipment, drugs or insurance premiums). This includes things like pre-employment physicals, workers comp review, drug testing, physical exams, MRIs, X-rays, counseling, dental work, etc.
  • Gross proceeds paid to attorneys. This category is for payments such as damage awards, which may include contingent fees, but not direct hourly billings for fees which are reported on the 1099-NEC.

Some of these categories are very tricky and this is not an all-inclusive list. Additional information can be found in the link below, Instructions for Forms 1099-MISC and 1099-NEC.

When are they due? Forms 1099-MISC must be filed this year by March 1, 2021, accompanied by a transmittal Form 1096.

 

Are there any payees who are exempt from receiving these forms?

Yes. The most common exempt entities are: 

  • Corporations (both C-corporations and S-corporations),
  • Government entities, and
  • Not-for-profit entities/charitable/tax-exempt entities.

 

How do I know if the payee is an exempt entity?

The best way to get the necessary information is to obtain a completed Form W-9 from the payee prior to making payments. The forms should be kept in a file for reference when it is time to prepare 1099 forms. It is acceptable to receive the W-9 information orally. If a payee refuses to provide a taxpayer identification number (TIN), reportable payments are subject to backup withholding at a rate of 24%, which must subsequently be deposited with the IRS. (See IRS instructions.)

A link to Form W-9 is below. The IRS website also has it available in Spanish.

 

Are there any other special rules?

Yes:

  • Do not report the purchase of goods or parts unless they are paid for in conjunction with services.
  • Do not report the payment of refunds or rebates.
  • Do not report payments for telephone, telegram, storage or freight services and similar items.
  • Do not report expense reimbursements that meet accountable plan rules.
  • If the payee is located in a state with state income tax, you must determine whether the payment must be reported to the state.
  • Payments made to sole proprietors and single-member LLCs operating with a name other than that of the owner should be reported to the owner’s name and Social Security number or Employment Identification Number.

Please see the IRS instructions for complete information.

 

Are there penalties for noncompliance?

Please note that the IRS began a compliance campaign in 2019 that focuses on 1099 compliance, including backup withholding. Additionally, the IRS is expanding payroll tax audits to include 1099 compliance.

The most common penalties assessed are:

  • Missed filing deadlines,
  • Missing TINs,
  • Name/TIN mismatches,
  • Using a TIN that has not been assigned, and
  • Failure to withhold backup withholding.

Additionally, if you are filing over 249 of any type of 1099 form, you must file electronically. For future reference, Congress has given the IRS permission to lower that electronic filing threshold to 100 after 2021. The threshold may drop as low as 10 forms in subsequent years.

https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

https://www.irs.gov/pub/irs-pdf/fw9.pdf


Highlights of the Coronavirus Response and Relief Supplemental Appropriations Act

President Trump has signed the stimulus bill passed by Congress on Dec. 27, 2020.  It includes $1.4 trillion to extend expiring tax measures and $1 trillion for new tax benefits. Some of the more important provisions are the following:

  • Permits a tax deduction for expenses paid for by a forgiven Paycheck Protection Program loan (reversing the previous position taken earlier this year by the IRS stating that these expenses were not deductible)
  • Extends the employee retention credit for the first two quarters of 2021
  • Retroactively permits the employee retention credit for businesses receiving PPP loans
  • Permits businesses to deduct 100% of restaurant meals in 2021 and 2022
  • Extends and expands the sick pay and paid family leave credits through 2021
  • Permits taxpayers who do not itemize to claim up to $600 in charitable contributions on their 2021 returns
  • Continues through 2021 the provision that permits corporations to deduct 25% of taxable income for charitable and food inventory contributions
  • Provides $600 checks for each taxpayer and their qualified children subject to income limitations