Employment Tax Reporting and 2020 Form 1099 Changes!
Oct 13, 2020
Employment tax is always an area of scrutiny by the IRS and state taxing authorities; particularly in the healthcare industry. Audit issues include reclassification of workers from independent contractor to employee; an individual receiving both a Form W-2 and Form 1099 in the same calendar year; incorrect employment tax forms preparation, the failure to issue Forms 1099 and general non-compliance with Form W-9 record keeping. Form 1099 non-compliance penalties for failure to file and failure to furnish can be substantial as well as the imposition of backup withholding, which is currently 24% for tax years through 2025 for non-maintaining certain vendor completed Forms W-9.
We addressed many changes to the new 2020 Forms 1099 that may be applicable to your organization back in February. For calendar year 2020 employment tax reporting the IRS has created more complexity with the creation of Form 1099-NEC; nonemployee compensation (“NEC”) and revising Form 1099-MISC miscellaneous income.
Significant Changes to Employment Tax Reporting
- The Form 1099-NEC generally replaces Form 1099-MISC, Box 7 nonemployee compensation and these payments should now be reported in Box 1 of Form 1099-NEC. However, please note that there may be an opportunity to report certain of these payments on Form 1099-MISC Box 6 as medical health care payments in lieu of Form 1099-NEC.
- Different due dates with respect to Forms 1099-NEC and Forms 1099-MISC. 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, Forms1099-MISC are due to the IRS by March 1, 2021 for paper filing or by March 31, 2021, for electronic filing.
- Modifications to electronic filing requirements with respect to Forms W-2 and Forms 1099. The electronic filing threshold remains at 250 or more forms filed for tax year 2020 but drops to 100 forms and 10 forms; respectively, for calendar years 2021 and 2022. Please note however that the reduced thresholds outlined herein are pending issuance of the Regulations at a future date.
- Individual state filing requirements are not yet known as the IRS has not communicated whether the Form 1099-NEC will be included in the combined federal/state filing program. Publication 1220 was revised in September 2020 and the Form 1099-NEC was still not listed as being included in this program. Taxpayers should continue to monitor for any IRS updates as well as individual updates from their specific states.
Withum’s Employment Tax Recommendations
The IRS and state taxing authorities consistently review employment taxes for non-compliance. As a result, and given the year 2020 changes relating to the Forms 1099-NEC and 1099-MISC we recommend a comprehensive review of your employment tax reporting function including:
- Payroll and accounts payable personnel should identify and review any workers who may be receiving both a Form W-2 and Form 1099.
- Your written worker classification policy should be reviewed and potentially revised.
- Your accounts payable files should include a fully-completed Form W-9 for all vendors.
- A review of all your current “non-1099 required” vendors should be completed for purposes of whether a Form 1099-NEC or MISC should be issued given the changes and new reporting requirements.
- A determination should be made as to whether each of your “Form 1099 required” vendors should be issued a Form 1099-NEC or Form 1099-MISC given the changes and new reporting requirements.
- Certain previously issued Form 1099-MISC Box 7 non-employee compensation reporting should be reviewed to determine whether to report certain vendors and payments on either Form 1099-NEC or Form 1099-MISC Box 6, medical health care payments.
- Your written accounts payable policy should be revised and updated for the Form 1099-NEC.
- Your new vendor policy should be revised and updated for the Form 1099-NEC.
We recommend that an organization forms an internal working group to accomplish the above tasks which include representatives from finance, IT, legal and internal audit. Moreover, documentation of the process undertaken with respect to the above review should also be maintained particularly in the event of an IRS or state employment tax audit examination.
Please contact a member of Withum’s Healthcare Services Group with any questions.
Authors: Scott Mariani, JD, Practice Leader, Healthcare Services | firstname.lastname@example.org, Hayley Shulman, CPA | email@example.com and Linda Gnesin | firstname.lastname@example.org