Reintroduced 1099-NEC Tax Form To Affect US Gig Workers

The 1099-NEC (Nonemployee Compensation) tax form – which hasn’t been seen since 1982 – will be reintroduced in 2021 for the 2020 tax year in the US.

Form 1099-NEC is intended to replace the nonemployee compensation part of form 1099-MISC – Miscellaneous Income. Form 1099-MISC will still be used for things like reporting gross proceeds to an attorney, Section 409A deferrals, and nonqualified deferred compensation income.

However, nonemployee compensation, such as money paid to freelancers, independent contractors and gig workers and others that aren’t employees, will now be reported on Form 1099-NEC.

Trades or businesses need to issue Form 1099-NEC if the following four conditions are met:

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 nonprofit organisations).

You made the payment to an individual, partnership, estate, or – in some cases – a corporation.

You made payments to the payee of at least $600 during the year.

Nonemployee compensation will now be reported on Form 1099-NEC.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) enacted on December 18 2015 made several changes to the way taxes are filed in the US. Notably, section 201 required taxpayers who claimed the Earned Income Tax Credit or Additional Child Tax Credit to wait until mid-February before they could receive their tax refunds.

As reported on Forbes, taxpayers who claim the EITC and/or the ACTC must have earned wages, typically reported on Form W-2 or – until now – a Form 1099-MISC.

Employers were required to furnish those forms to taxpayers by January 31. However, employers could wait until the end of February (if filing on paper) or the end of March (if filing electronically) to submit these forms to the government.

This has meant that taxpayers who filed early could get tax refunds even before the IRS received the related forms from the employers, which left room for fraud as people could file false tax returns weeks before the IRS had any chance to confirm wage information.

The PATH Act also required employers to submit forms W-2 and forms 1099-MISC to the Social Security Administration on January 31 – the same date that taxpayers receive their documents.

By moving the tax refund issue date to February 15, the IRS has time to match up the employer forms with the taxpayer forms. However, the PATH Act didn’t change the due dates for all forms 1099-MISC.

This has proved a confusing matter for employers, taxpayers, IRS systems and employees – hence the proposed solution to bring back form 1099-NEC to report nonemployee compensation.

Confusing things further is that this year, the IRS released its updated Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498 and W-2G.

Publication 1220 helps employers and tax professionals understand the specifications for filing certain information forms electronically with the IRS, including the requirements under the Combined Federal/State Filing Program (CF/SF).

The CF/SF Program was created to simplify the filing of information returns. As part of the program, the IRS forwards original and corrected information returns (filed electronically) to participating states – free of charge for approved filers. That means that separate reporting to those states is not required.

Information returns that may be filed with the CF/SF Program are:

Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.

Form 1099-DIV, Dividends and Distributions.

Form 1099-G, Certain Government Payments.

Form 1099-INT, Interest Income.

Form 1099-K, Payment Card and Third Party Network Transactions.

Form 1099-MISC, Miscellaneous Income.

Form 1099-OID, Original Issue Discount.

Form 1099-PATR, Taxable Distributions Received From Cooperatives.

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Form 5498, IRA Contribution Information.

This highlights that for now, Form 1099-NEC is not included in the CF/SF Program for 2020, meaning that Forms 1099-NEC will have to be filed separately for state purposes.

This is important information for some taxpayers who might have relied on the CF/SF Program in the past to forward Form 1099-MISC for nonemployees. For 2021, freelancers, independent contractors, gig workers and others that aren’t employees have to make other arrangements for the new forms.

Even though beginning with tax year 2020, the above mentioned professionals should use the new Form 1099-NEC to report nonemployee compensation, however they should not report prior-year nonemployee compensation on Form 1099-NEC.

If freelancers need to issue a form to report prior-year nonemployee compensation – for example, if they realise they have forgotten to report a 2019 payment – they will need to use a prior-year Form 1099-MISC.

These changes will also impact businesses who work with independent contractors and freelancers. Independent contractors and freelancers also need to be aware of this information so that they will know which form to look out for, (Form 1099-NEC) and when (by January 31 in most years, but in 2021, it will be February 1).

The IRS will provide more information about filing requirements for 2021 later this year.