Dr. David L. Marrison, Agriculture and Natural Resources Educator, Coshocton County, The Ohio State University
2020 has been a year of change and this holds true for tax management. Farm and agribusiness managers will need to be aware that significant changes have been instituted with regards to reporting non-employee compensation. The goal of this article is to share details on the return of IRS Form 1099-NEC and how it should be used instead of the IRS Form 1099-MISC when reporting compensation for nonemployees.
Starting in tax year 2020, Form 1099-NEC will be used to report compensation totaling more than $600 (per year) paid to a non-employee for certain services performed for your business.
Previously, business owners would file Form 1099-MISC to report non-employee compensation (in box 7). Now, this compensation is to be listed in Box 1 on the 1099-NEC. It should be noted that Form 1099-NEC was previously used by the IRS until 1982 when the IRS added box 7 to Form 1099-MISC and discontinued the 1099-NEC form.
If the following four conditions are met, you must generally report a payment as non-employee compensation on Form 1099-NEC:
- You made the payment to someone who is not your employee;
- You made the payment for services in the course of your trade or business (including government agencies and non-profit organizations);
- You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
- You made payments to the payee of at least $600 during the year.
Examples of “non-employee compensation” could include hiring a neighboring farmer to harvest, spray, or plant your crops or independent contractors, such as crop consultants, mechanics, accountants, and veterinarians. Payment for parts or materials used to perform the service (if supplying the parts or materials was incidental to providing the service) is included in the amount reported as non-employee compensation.
Reporting is needed for payments made to unincorporated businesses (i.e., sole proprietorship or LLC) in excess of $600. Generally, payments to a corporation do not require a 1099-NEC to be issued or payments made to LLC which have elected to be taxed as a corporation. One exception that should be noted is that payments over $600 to an attorney, regardless of business entity (corporation or unincorporated), need to be reported on the Form 1099-NEC.
A Form 1099-NEC can be issued even if the payment is below the $600 threshold or is to a party that you are in doubt as to whether you are required to issue this informational return. There are no prohibitions or penalties for doing this.
If you are required to file a Form 1099-NEC, you must furnish a statement to the recipient and to the IRS by January 31 of each year or the next business day, if the due date is on a weekend or holiday. For the tax reporting year of 2020, the form is due February 1, 2021.
Why the Change?
The Protecting Americans from Tax Hikes (PATH) Act of 2015 accelerated the due date for filing 1099 forms that include non-employee compensation from February 28 to January 30 and eliminated the automatic 30-day extension for forms that included non-employee compensation. This created a situation where there were two deadlines for the same form. Separating the non-employee compensation from the 1099-MISC to the 1099-NEC is expected to reduce fraud and to avoid fines for late filing.
The Form 1099-MISC will still be used to report a variety of income payments made to others. These include, but are not limited to:
- At least $10 in royalties (box 2) or broker payments in lieu of dividends or tax-exempt interest (box 8)
- At least $600 in:
- Rents (box 1)
- Prizes and awards (box 3)
- Medical and health care payments (box 6)
- Crop Insurance proceeds (box 9)
The 1099-MISC forms must be to the recipient by January 31 but remain under the old filing deadline to the IRS of February 28 or in the case of e-filed returns March 31.
If you fail to file a correct information return by the due date (to the IRS or service provider) and you cannot show reasonable cause, you may be subject to a penalty.
The amount of the penalty for not correctly filing a 1099 form is based on when you file the corrected return. The penalties can be significant. More details can found at: https://www.irs.gov/pub/irs-pdf/i1099gi.pdf
Producers can view the instructions for completing IRS Form 1099-NEC and 1099-MISC at: https://www.irs.gov/pub/irs-prior/i1099msc--2020.pdf
The 1099-NEC can be accessed at: https://www.irs.gov/pub/irs-pdf/f1099nec.pdf
The 1099-MISC can be accessed at: https://www.irs.gov/pub/irs-pdf/f1099msc.pdf
The information provided in this article is for educational purposes. This article was designed to provide accurate tax education information. Farm managers are encouraged to seek the assistance of a qualified tax professional with the completion of their taxes.