Form 1099-MISC and 1099-NEC deadlines are fast approaching, and you don’t want an IRS audit revealing that your company sent vendors the wrong form.
Determining when to use 1099-NEC for payments of $600 or more to nonemployees can be tricky and 1099-MISC is a catch-all that many businesses like yours may still need to file. So how well do your A/P and Payroll staffers know the nuanced differences between them?
In many cases, Form 1099-NEC applies
Form 1099-NEC is used to report payments to vendors – primarily independent contractors and freelance workers, such as:
- sole proprietorships
- limited liability companies that don’t file as C corporations or S corporations, and
That covers a wide variety of vendors.
In the Premier Learning Solutions workshop “Form 1099 Reporting Updates for Timely, Compliant Filing,” Tricia Richardson, CPP, SPHR and SHRM-SCP, said the Form W-9 you have on file for these vendors will be your guide.
“That W-9 comes from your contractor, from the vendor to you, to tell you what kind of company that they are,” she said.
Richardson also noted that backup withholding of federal income tax for a vendor in any amount needs to be reported on 1099-NEC. That goes in Box 4.
In addition, 1099-NEC should be used for reporting attorney fees of $600 or more that were paid “in the course of your trade or business,” she said. Some good examples are if you consult an attorney on labor law, accounting compliance or contract law matters.
Form 1099-NEC is for reporting board member compensation as well.
This is all information that used to be included on Form 1099-MISC. But starting with 2020 earnings, IRS expects this info to be captured on Form 1099-NEC. “If you don’t file the right 1099, you will need to amend (the return). So make sure, as you prepare for year-end, that you have these set up correctly to the right folks,” Richardson said.
The countdown is on! Form 1099-NEC is due to both the IRS and recipients by January 31, 2023.
Why Form 1099-MISC’s still around
IRS says to file Form 1099-MISC for:
- rental income
- royalties, prizes and awards
- excess “golden parachute” termination agreement payments (e.g., severance pay, cash bonuses, stock options, etc.)
- payments to a trust (which requires issuing Forms 1099-MISC, each in the full amount, to the attorney and their client)
- fishing boat proceeds
- substitute payments in lieu of dividends or tax-exempt interest
- gross proceeds paid to an attorney as part of a settlement agreement that aren’t reportable in Box 1 of 1099-NEC
- medical/healthcare payments to a provider, nurse or hospital for goods and services as part of the normal course of business (including workplace vaccinations, drug screenings, expert testimony and lab services), or
- cash payments for purchases of fish that will be resold.
Generally, corporations aren’t supposed to receive Forms 1099. However, if any of those last four payment types were made to a corporation, those are exceptions and a 1099-MISC must be filed.
In another Premier Learning Solutions workshop, “1099-MISC & 1099-NEC Updates: Ensure Accurate Filing,” Richardson named specific medical/healthcare payments that are not supposed to be reported on 1099-MISC:
- Prescription drugs purchased from pharmacies
- Payments to tax-exempt or any government-owned hospitals or extended care facilities
- Payments made from a flexible spending arrangement, and
- Payments from an employer-provided health reimbursement arrangement.
Form 1099-MISC is also for reporting direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
The 1099-MISC Copy A is due to IRS by February 28, 2023 if you’re filing paper forms, or by March 31, 2023 if filing electronically. Recipients must have Copy B by January 31, 2023, but if there are payments recorded in Boxes 8 or 10 then the deadline is February 15, 2023.
What they have in common
Richardson said that regardless of which 1099 forms you’re using, it’s important to remember that for each 1099 reporting type (MISC, NEC, etc.), the IRS needs you to file a separate Form 1096, “Annual Summary and Transmittal of U.S. Information Returns.”
Both 1099-NEC and 1099-MISC are now evergreen, “continuous use” forms that don’t have specific tax years printed on them. Instead, there’s a box with “20___” and you fill in the rest of the year number. However, Richardson said to avoid handwriting the last two digits of the tax year, and to instead use a program that digitally fills out PDF documents.
Also, for now the IRS mandatory electronic filing threshold for information returns is still 250 or more. If the Treasury Department decides to lower that, per the Taxpayer First Act of 2019, we’ll let you know.
Speaking of electronic filing, IRS is launching a new Information Return Intake System platform in January that’s supposed to make it easier for taxpayers to file small or large volumes of Forms 1099 electronically without third-party software and to choose an electronic filing option (the FIRE system will still be available).
Certain state and local governments also have 1099 filing requirements, so make verifying thresholds and guidelines in the states you do business in part of your Finance team’s year-end workflow.