This year, the COVID-19 (coronavirus) pandemic has taken a toll on people’s health along with businesses and the economy. Small businesses have faced crippling challenges this year around the globe and here in the U.S., and even with all of this turmoil, the Internal Revenue Service (IRS) is still moving forward with making changes. The IRS is changing 1099-MISC Box 7 (Non-Employee Compensation) to a new form called 1099-NEC, effective as of the 2020 tax year. It is important to understand these changes and how they affect your business before you file your 2020 business return.
Starting in January 2021, your business will need to file their business tax return using the new tax form. The good news is it is pretty simple. On the new 1099-NEC tax form, non-employee compensation will be for Box 1, and federal withholding for that contract employee is located in Box 4. If your company previously reported in 1099-MISC Box 7, you will now be switching and reporting in 1099-NEC Box 1. Then on the 1099-NEC form, you will report your state tax withholdings, your payer state ID number, and your state income on Boxes 5, 6, and 7, respectively. It is not difficult to file, but the 1099-NEC form is new, and most people do not like changes!
Do you need to use this form?
The short answer is yes if you have an organization that pays a minimum payment of $600 in the following areas:
- You have services that were done by a person who is not your employee (as well as any parts and materials used). You will report this under Box 1.
- You have made cash payments for aquatic life such as fish, which your company bought from someone who is in the trade or in the business of capturing fish. You will report this under Box 1.
- You have made payments to an attorney, whether that is a law firm or some other entity giving you legal services. For attorney fees – in the amount of $600 or higher – that you paid during your trade or business, they need to be reported under Box 1, Section 6041A(a)(1) of the new 1099-NEC form.
- Anyone you withheld federal income tax from under the backup withholding rules (no matter how much you paid) will need to be reported under Box 4.
- On the new 1099-MISC form, it will still have the rest of your other income that you normally report (other than Boxes 7 through 17, which have been moved around on the form). Only Box 1 (Rents) and Box 3 (Other Income) are still the same as they always were.
Accounting Software Programs
So right now, many accounting software programs probably are not able to support a 1099-NEC flag if you are a vendor. They likely also do not provide a 1099-NEC report. If you have vendors that typically use 1099-MISC Boxes 1 or 3, it might be good for them to think about adding a Display Name flag. This way when the New Year rolls around in January, they just download the 1099-MISC CSV file and separate those vendors who will need to use the 1099-NEC.
Also, APIs connecting accounting software to the 1099-NEC software might not be updated on time as well. But you can contact the organization’s 1099 software tech support to make sure they have plans in place for adding vendors to the right form. It is something we can help you with or point you in the right direction.
When it comes to state requirements, however, the individual filing requirements for one is not out yet. Hopefully, the IRS will make it so that the 1099-NEC will be part of the Combined Federal/State program, so the new state 1099-NEC requirements will come out soon. It is important to stay on top of all the state and federal changes.
Previous Year’s Corrections
If your company has to correct the Box & Talley on 2019’s 1099-MISC, but there is no Box 7 on the new 1099-MISC Box 7, the IRS notes that any corrections you have for 1099-MISC box 7 from the tax years 2019 and before, they will stay the same as the old 1099-MISC form.
Your 1099-NEC due date will be February 1, 2021. It is both to the IRS and recipients. While the new 1099-MISC due date is not due until 31, 2021, if you are doing an IRS e-file, since it won’t have a Box 7, it will be due to recipients on February 1, 2021.
With all the things you are dealing with this year, we hope this information can help you be prepared for the next year’s tax season. Corporate Capital is excited to help your company gain the expertise and resources you need to maximize your profits! We can help your corporation throughout the life of your business, just as our one-stop-shop has been helping corporations and LLCs across the USA. We thank you in advance for choosing Corporate Capital, Inc. Call 855.371.0070 to learn more!
All C Corporations (1120) and Individual Tax Returns are due by October 15, 2020, for those who filed a tax extension with the IRS. If you have not filed and need help, we are taking on new clients and will make sure your filing is done accurately and on time! Call today!