By Kathy Ploch, CPA-Houston
The 2015 Protecting Americans from Tax Hikes (PATH) Act accelerated the filing date of nonemployee compensation (NEC) reported on Form 1099-MISC from Feb. 28 to Jan. 31 to combat identity theft. However, this due date change created a lot of confusion for both the taxpayers and the IRS. It didn’t help that the PATH Act also increased penalties to employers that filed late.
Then, in 2020, the IRS revived the old Form 1099-NEC back from the 1980s to be used exclusively for NEC reporting. Had the form not changed, many businesses would have continued to incur late file penalties from 1099-MISC deadline confusion.
The biggest change for 2021 is that the IRS redesigned the 1099-NEC to three forms per page rather than two per page. It might be a good idea to order supplies now since new envelopes will be required. Also going forward, the IRS will have continuous-use forms, which means the year will not be pre-printed on the form. (See 2022 draft Form 1099-NEC.)
The backup withholding rate for 2021 is still 24%, lowered from 28% in the 2017 Tax Cuts and Jobs Act (TCJA). However, there is talk that it could be raised back to 28% in the future. Also, the IRS will include the 1099-NEC under its TIN Matching Program next year. Practitioners should be ready for those annoying “B” notices (CP2100) for backup withholding.
As of Sept. 10, 2021, the IRS retired its paper Form 4419, the application to use the Filing Information Returns Electronically (FIRE) System for e-filing the 1099s directly to the IRS. Starting Sept. 26, 2021, you must apply for a Transmitter Control Code (TCC) to use the online FIRE System. You only submit a paper Form 4419 if you have an active TCC and need to update certain sections on the form. However, the online platform is not yet available. (See FIRE System Update.)
The 2019 Taxpayer First Act (TFA) decreased the mandatory e-filing thresholds for 1099s and W-2s. The current standard for 2021 is still 250+ information returns. In 2022, the trigger drops to 100 returns and in 2023, the amount will decrease to only 10 forms. I think you can see that soon after, 100% will be required to be submitted electronically. The good news is that a TFA modernization provision requires the IRS to develop a new online portal for businesses to both prepare and file Forms 1099. The deadline for implementation is Jan. 1, 2023. It will have the same user interface and functionality as the Social Security Administration’s Business Services Online. I used this platform back in the 1990s for W-2s and it worked wonderfully. I never understood why the IRS could not do the same!
It is always wise to at least read the first page of the instructions under the “What’s New” section. There is a detailed schedule of penalties in Publication 1586. I am sure we all have had clients that as we are preparing their tax returns, we find out they should have filed some type of 1099 to vendors. The penalty schedule is based on how many months after the deadline you file. So, here is another reason not to wait too long to start preparing a client’s return. The penalty amount dramatically increases after Aug. 1.
Take a short breather from our continuous tax season the last couple of years and start the 2022 tax season armed with your new 1099 knowledge.