Starting with the 2021 tax season, businesses started submitting Form 1099-NEC for independent contractors and to the IRS. The IRS started phasing in this requirement for businesses to submit 1099-MISC before 2020. But starting with 2020, businesses are required to submit the 1099-NEC to the IRS. This blog discusses the effect of the new tax law on small businesses and how to avoid the new tax law penalties.
Table of Contents
- Why did you switch to 1099-NEC?
- What information will appear on 1099 NEC in 2022?
- IRS Form 1099 NEC, Who receives it in 2022?
- Does failing to file 1099 Non-Employee Compensation result in penalties?
Why did you switch to 1099-NEC?
With the passing of the PATH Act in 2015, Congress necessitated the reinstatement of the 1099-NEC. But due to various issues with the form’s implementation, its usage postponed. But in 2020, it has come back its way to report the payments made to contractors on business and trade.
The adjustment being implemented in order to combat false credit claims. Particularly for the earned income tax credit (EITC), which is based on earned income from working. Scammers were filing 1099-MISC tax forms before the customary February 28 deadline, giving the IRS no opportunity to double-check the earned income stated on the filings. As a temporary solution, 1099-MISC forms containing non-employee remuneration have to be filed by January 31, according to the IRS.
What information will appear on 1099 NEC in 2022?
In 2021, Form 1099 NEC is a breeze to use because it solely deals with non-employee compensation and other sections for withholding federal and state income taxes. But in 2022, a new box added “direct sales”. Yes, direct sales of consumer products on resale based on deposit- commission, or buy-sell. Again with the addition of box 2, the confusion also rises. Because businesses can use both 1099 MISC box 7 or 1099 NEC box 2 to report direct sales.
IRS Form 1099 NEC, Who receives it in 2022?
If you run a business and hire someone who isn’t an employee and pay them $600 or more in a calendar year, provide them a Form 1099-NEC as soon as possible after the year ends. Additionally, if the payer made direct sales of consumer products of $5,000 or more, then he/she can receive a 1099 NEC Tax Form.
Does failing to file 1099 Non-Employee Compensation result in penalties?
Failure to file the mandatory informative returns carries a penalty of $280 per return. If a proper but late information returns filed no later than 30 days after the mandatory filing date of January 31st, 2022, the penalty may reduced to $50. It may potentially lowered to $110 if filed later than 30 days but before August 1, 2022. Please keep in mind that if you have 250 or more information returns to file, you must do so online.
The time has come for all tax professionals to switch over to the new 1099-NEC forms. This change is in place for the tax year 2022. We hope that this blog post has provided some helpful information on how to prepare for the switch. If you have any further questions on the new 1099-NEC forms please feel free to contact us anytime at +1 316-869-0948 or Form1099Online.