While the general rules surrounding the types of income to be reported have remained the same, the Internal Revenue Service (“IRS”) has split the original Form 1099 used to report nonemployee compensation (“NEC”) from other miscellaneous income types beginning in 2020.
The most significant change to the Form 1099 in 2020 is the breakout of NEC from Box 7 of Form 1099-MISC to its own Form 1099-NEC. NEC still includes payments of $600 or more for services of nonemployees and attorneys, but these types of payments will now be reported in Box 1 of the new 2020 Form 1099-NEC. As such, starting with the 2020 forms, an organization should not report NEC on Form 1099-MISC. Payments of $600 or more for rent, prizes and awards, gross proceeds to attorneys, certain medical and health care payments and royalties over $10 should still be reported on Form 1099-MISC. Please note that the 2020 Form 1099-MISC has been modified accordingly to eliminate the input of a dollar amount into Box 7. In addition, please note that many of the other Form 1099 MISC Box numbers have been rearranged.
These changes to the Forms 1099 have corresponding filing deadlines. The 2020 Form 1099-NEC is due to both recipients and the IRS by February 1, 2021, regardless of whether filing electronically or by paper. The 2020 Form 1099-MISC is also due to recipients by February 1, 2021; however, these Forms are due to the IRS by March 1, 2021 for paper filing or by March 31, 2021, for electronic filing.
The IRS also modified the threshold for the required electronic filing of most information returns, such as Forms W-2 and 1099. The threshold remains at 250 or more forms filed for the tax year 2020, but drops to 100 forms in tax year 2021, and 10 forms in tax year 2022.
Due to increased awareness from current cases regarding employment misclassification, Form 1099 audits are becoming more common. This is especially true in the healthcare industry where the IRS routinely audits organizations for employment tax issues, including Forms W-9 and 1099 compliance. In addition, various states, such as California, New York, and New Jersey are becoming much more aggressive in targeting those who misclassify workers as independent contractors rather than employees. Regardless of whether the misclassification was intentional or unintentional, the new legislation proposed in the aforementioned states poses serious consequences for noncompliance. Not only are misclassified workers being deprived of certain rights guaranteed to regular employees, but the states are also losing out on tens of millions of dollars in tax revenue. As a result of these employment misclassification practices, Withum anticipates that the number of employment tax audit examinations, including Forms W-9 and 1099 will significantly escalate in the near future.
A best practice relating to accounts payable tax compliance is to obtain a Form W-9 from all vendors. A completed Form W-9 is valid indefinitely unless the IRS or a taxpayer notifies a reporting entity that changes are required. Form W-9 provides important information such as the vendor’s name, taxpayer identification number (“TIN”), and specifies Federal tax classification (type of business entity). Form W-9 also contains a certification that the person filling out the form is not subject to backup withholding, which is currently 24% for tax years 2018 – 2025. Moreover, an organization will not be subject to backup withholding if it fails to issue a Form 1099 but has a completed Form W-9 on file for the vendor.
In addition, having a Form W-9 for every vendor in your files is necessary when determining if special exceptions to the general rules apply, such as determining if a limited liability company vendor should be issued a Form 1099. Ultimately, obtaining a Form W-9 from all vendors also indicates a culture of tax compliance, particularly in the event of IRS and/or state tax audit examination.
The transition to new Forms 1099 creates a timely planning opportunity for healthcare organizations. During 2020 we recommend:
We believe that certain previously reported Forms 1099-MISC Box 7 vendors (e.g. physicians) may be reported on either 2020 Forms 1099-MISC or Forms 1099-NEC in some instances. A healthcare organization’s internal working group should include finance, compliance and legal departments.
Please do not hesitate to contact a member of Withum’s Healthcare Services Group with any questions.