Tis’ the season! Oh, it’s here…for CPA’s and small businesses alike….TAX FILING SEASON!
Yes, my friends, it’s upon us. And guess what? IRS has decided to change it up a bit, as if what we are currently dealing with isn’t enough.
If you pay independent contractors in your business or you are an independent contractor yourself, please keep reading!
Up until now, we have issued Form 1099MISC to our independent contractors in box #7 called “nonemployee compensation”. Right?
For filing season 2020 that is changing. NOW we are going to be using Form 1099NEC. What’s the NEC stand for? Simple “NonEmployee Compensation”.
I would like to take this opportunity to discuss exactly who is required to file and what type of income goes here. It covers more than just payments for trade or service to an outside contractor.
Okay, now I get it, this is a wrench in the fire. I presume the reasoning for this change is due to IRS trying to be more astute in tracking this income.
WHY? Because nonemployee compensation renders that lovely little tax called the “self-employment tax”…the one that sneaks up and bites you in the A$$.
This form will segregate solely those individuals or small businesses that will be subject to that tax. For IRS this is a win-win situation. A separate form tracking that for them! Now it’s not buried in the 1099MISC box #7.
Let’s go through who should be filing this form, shall we?
• Sole Proprietors
These are the qualifying entities that MUST file Form 1099NEC if you have issued reportable payments for services rendered from outside sources, i.e. not your employees which are reported on Form W-2.
For my non-profit friends, although you do not operate for gain or profit, you are still considered engaged in a trade or business and need to file this form as well.
It makes sense at this point to discuss what constitutes Nonemployee Compensation so here we go:
• The payments are issued to a nonemployee.
• The payment was made on behalf of the payers (you the employer) trade or business, including non-profits.
• These payments were made to a partnership, estate, individual and in some cases a corporation. (talk to your BFF/CPA for clarification on that last one)
• Payments made to the recipient total $600 or more during the calendar year.
• And under the backup withholding rules, if federal income tax was withheld with any payments to a payee even if they didn’t hit that $600 mark.
Now that we have Identified the “what” let’s identify examples of payments to be reported as NEC:
• Fees paid for professional services, ie. Attorneys, architects, accountants, contractors and engineers. There is additional clarification on the attorney fees that you should discuss with your BFF/CPA as well.
• Fees paid by one professional to another for referral fees or fee-splitting.
• Payments for expert witness testimony in law suits.
• Travel reimbursement for an independent contractor that has hit the $600 threshold.
• Payments to entertainers for services rendered.
• An exchange for services between individuals within the scope of their businesses. For example I prepare a yoga instructor’s tax return and she provides me with private lessons. The fair market value of these services performed belong on the 1099NEC.
Again, these are just a few examples to help you get rolling. If you have specific questions about your payments you should always consult your tax professional.
Sometimes we receive payments in a form other than cash. For instance, you are the top selling realtor in your agency and you win the annual award.
Let’s say that award is a shiny gold watch. You should receive a 1099NEC for the fair market value of the watch. If there isn’t an appraisal or FMV available, then normally the manufacturer’s suggested retail value would be used.
Payments in Virtual Currency has become a “thing” nowadays as well. If you made or received payments in virtual currency, these payments are included on Form 1099NEC. They are measured in fair market value (US dollars) as of the day the payment was made.
Here is a link for the actual 2020 Form 1099NEC so you can take a peek.
PHEW! What a mental workout right there! I definitely felt this was important to deliver to you.
With so many changes.. especially this year.. you really need to keep yourself abreast of the tax code. As a small business owner, you have so much on your plate daily…add a pandemic to that mix!
I truly care about small businesses, if you couldn’t tell. Small businesses are the very essence of the USA and need to be taken care of.
If you don’t have a trusted tax advisor, I strongly suggest you find one, especially this year. There are just too many moving parts and the tax law is continually changing at a rapid pace.
Let your BFF/CPA take the burden off of you. I promise you won’t regret it when someone else has the responsibility to keep up on the tax code for you!
I hoped this served you. If you know a small business owner that needs this information please share it. We are honored to serve you!