This is our annual reminder that if you use workers other than employees to perform services for your business and pay them $600 or more for the year, you are required to issue each one a Form 1099-NEC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2020 must be provided to workers no later than February 1, 2021. The forms are normally due January 31, but since it falls on a Sunday in 2021, the due date is extended until February 1.
As you probably noticed, the IRS has switched forms for 2020 reporting. They have resurrected a form that hasn’t been used since the early 1980s—Form 1099-NEC, Nonemployee Compensation. The prior 1099-MISC form was used for reporting more than just nonemployee compensation; because 1099s reporting non-employee compensation need to be filed by January 31, and the ones reporting other information are not due to the IRS until March 31, this created enough confusion that the IRS made the change.
The requirement to file Form 1099-NEC may also apply to landlords in light of tax reform’s 20% pass-through deduction (Sec. 199A deduction). The IRS, in regulations for this tax code section, cautions landlords that to be treated as a trade or business (and therefore to be generally eligible for the 199A deduction), they should consider reporting payments to independent contractor service providers on IRS Form 1099-NEC. This generally wasn’t required for rental activities in the past and still isn’t required when a rental is classified as an investment rather than as a trade or business.
It is not uncommon to, say, have a repairman out early in the year, pay them less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you could easily overlook getting the necessary information, such as their complete name and tax identification number (TIN), to file the 1099s for the year. Therefore, it is good practice to have unincorporated individuals complete and sign the IRS Form W-9 the first time you use their services. Having properly completed and signed Form W-9s for all independent contractors and service providers eliminates oversights and protects you against IRS penalties and conflicts.
The government provides IRS Form W-9 as a means for you to obtain the data required to file 1099s for your vendors. This data includes the vendor’s name, address, type of business entity and TIN (usually a Social Security number or an Employer Identification Number) as well as certifications of the ID number and citizenship status. It also provides verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have potential vendors complete Form W-9 prior to engaging in business with them. The form can either be printed to fill out or completed onscreen and then printed. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS.
CAUTION: 1099-NEC worker reporting does not apply to household workers, as they are considered employees. Call for additional information.
To avoid a penalty, the government’s copies of the 1099-NECs must also be sent to the IRS by February 1, 2021. The penalties can be significant, ranging between $50 and $280 for each 1099-NEC filed late. If you failed to obtain a worker’s Social Security number but file the 1099 on time, the penalty for not including the SSN is $50, which is less than the potential $280 penalty for filing late or not at all.
1099-NEC forms must be filed electronically or on special optically scannable forms. If you need assistance with filing 1099-NEC or have questions related to this issue, please give this office a call. You can complete the 1099-NEC worksheet and forward it to this firm to prepare 1099s. Also, make sure you have all of your non-employee workers or service providers complete a Form W-9 for 2020.
Please note: Some material may be time-sensitive and may no longer apply. Please contact us with any questions.