New 1099 Reporting Rules for 2020​

In the year 2020, there have been plenty of changes, including those within the U.S 1099 system. While the general rules regarding what must be reported are the same, the original Form 1099 is now split into two parts.

One of these changes includes a recently released 1099-NEC form which is used to report compensation for non-employees. The other important change is the new 1099-MISC form. This is now used to report miscellaneous income.

Because these changes have occurred, it is important to be aware of how these changes affect you. With tax season just about underway, AIM Solutions, Inc. wanted to make sure you will be able to remain IRS compliant for 2020.

1099 Reporting

If you made, or received, any payment during the calendar year as a small business or self-employed person, then you will need to file a Form 1099. Some examples of why you would need to file a 1099 include:

• Services performed by independent contractors
• Rent
• Backup withholding

You are not required to file a Form 1099 if you are not engaged in a trade or business, or the sum of all payments is less than $600 in one tax year. In order to file a Form 1099, you will need to obtain a W-9 Form from all vendors and then send it to the IRS.

Consequences of Not Filing, Incorrectly Filing or Filing Late Form 1099

The consequences for an incorrect Form 1099 is $100. If you provide an incorrect information statement, then there is another $100 fine. The maximum penalty is $1.5 million per year. If you do not report your income, the IRS might impose an accuracy-related penalty that is equal to 20 percent of your total underpayment.

If you happen to be late in your reporting, but within 30 days of the due date, then you will have a $50 penalty. This is capped at $187,500 for small businesses and at $536,000 per year for larger businesses.

Form 1099-NEC

The new Form 1099-NEC was created to avoid some compliance issues that resulted from the new Protecting Americans from Tax Hikes (PATH) Act of 2015.

For the first year, in 2020, businesses will need to report payments for services over $600. This will be done by filing Form 1099-NEC. This will include any amounts paid to independent contractors or attorneys for services provided.

Previously, these were reported on line 7 of Form 1099-MISC, but now they will be on line 1 of Form 1099-NEC. Any backup withholdings will be reported in Box 4 of Form 1099-NEC.

Most of these Form 1099-NEC’s will be due January 31, 2021, and there will be no extensions unless you can prove you have evidence of hardship.

Redesigned Form 1099-MISC

Because of the new Form 1099-NEC, the IRS has changed some of the boxes on the original Form 1099-MISC.  As stated above, Box 7 was originally used to report non-employee compensation. Now, Box 7 has been replaced with “Payer made direct sales of $5,000 or more of consumer to a buyer (recipient) for resale”.

You should also be sure to report any gross proceeds paid to attorneys or law firms that were connected with a legal settlement. These must now be reported on Form 1099-MISC in Box 10, but any attorney or law firm payments are reported on the new Form 1099-NEC.

Form 1099-K

Form 1099-K is also known as the Payment Card and Third Party Network Transaction form. This form is used by credit card companies and third-party processors such as PayPal or Amazon. It is used to report payment transactions that are processed for them and other third parties.

How the New 1099 Reporting Rules Affects Your Distribution Business

If you are operating a distribution business, you need to make sure that you are filing properly. Every single business will need to file a Form 1099-NEC but you will only be required to file a Form 1099-MISC for two reasons. The first is if you make any direct sales of over $5,000 to resale buyers and the second is if you were involved with attorneys and legal settlements. Otherwise, not much will change aside from your Form 1099-NEC looking differently.

At AIM solutions, Inc. we can help you with all aspects of distribution. Contact us today to learn more.