5 Things to Know About New 1099 NEC Form

New Form 1099 NEC: Did you pay an attorney for performing legal services in the tax year 2020? Do the payments exceed $600? Then you need to report the payments on a 1099 information return. As the payments made to attorneys for legal services considered as non-employee compensation.

Doesn’t know which 1099 Form to use? Don’t worry! Previously, these payments were reported on Form 1099 MISC. But as per the IRS 2020 regulations, payments made to attorneys for performing legal services are reported on the new Form 1099 NEC. Due to this new form, a lot of confusion surrounds. Be aware of the below information to clear the confusion and to avoid unnecessary penalties.

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Major state reporting updates

Beginning with the 2020 tax year, the IRS has made several changes in 1099 reporting. Among all of them, the due date to report non-employee compensation was the major one. Apart from these changes, the IRS has brought back the Form 1099 NEC into existence from 2020. Due to this, the reporting process changed from Form 1099 MISC box 7 to the new 1099 NEC. As the new Form 1099 NEC not apart from the Combined Federal/State filing program, the information return not automatically submitted to the states. So, business owners must have to create a process to produce state transmittals of Form 1099 NEC. Finally, the new 1099 NEC Tax Form must submitted to the IRS, to the recipient, and as well as to the states.

Risk of B Notices

Due to the confusion created by the new Form 1099 NEC, the risk of getting B notices for the business owners high. The IRS imposes penalties based on the incorrect information on each 1099 Form received. Incorrect information includes invalid TIN, incorrect name of the payee, etc. In such events, if the businesses issue both the form will receive B-notices from the IRS. Additionally, penalties proposed for each 1099 Form filed with incorrect information. To minimize the risk of penalties of B notices, ensure that the name of the payee with the TIN combination correct.

Backup withholding requirements

It is important to update the back withholding process so that the technology can differentiate a 1099 NEC transaction from a 1099 MISC. Furthermore, Form 945 an annual return for withholding federal income taxes must adjust automatically. It is determined that the reconciliation of backup withholding includes the new Form 1099 NEC. On the other hand, the taxpayers can establish a general ledger liability to track 1099 NEC backup withholding. Moreover, they can consider what kinds of operational reports need for reconciliation, and reporting.

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Reporting a 1099 NEC and 1099 MISC for the same recipient

As we know, most businesses hire non-employee and pay them compensation apart from regular salaries given to employees. These payments reported previously on Form 1099 MISC box 7. Apart from these payments, miscellaneous income paid to contractors also reported on the same form. So, if you make payments to the same individual as rent and compensation, then you may report the payments on the same form. But from 2020, if you make such payments, you need to issue two different tax forms for the same individual. Producing two different 1099 Forms for a single recipient is complex and difficult to manage. So, make sure to identify the payments made to the contractor and report them on the correct information return to avoid penalties.

Form 1099 MISC changed too

As the IRS brought a new 1099 information return to report non-employee compensation, Form 1099 MISC was revised for the 2020 tax year. Furthermore, payers must analyze the transactions made to the individuals before reporting on 1099 MISC or 1099 NEC. For example, payments made to attorneys report on 1099 MISC box 14. But from the 2020 tax year, payments made to attorneys reported on box 10 of the form. Besides, if the payments made to the attorney for performing legal services, then report it on the new Form 1099 NEC.

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