Form 1099 MISC Box 7- Major Changes in 2020: Did you hire a contractor and paid him $600 or more in the prior year? If “Yes”, then you need to file an information return with the IRS. As per the IRS, the non-employee compensation and miscellaneous income were reported on the same form previously. But now from 2020, these two payments are reported in two different forms.
We will let you know about the major changes took in IRS Form 1099 MISC. You will also get to know why the change occurred in the 1099 information returns. We also provide you information about the impact of the change.
1099 Miscellaneous income reporting changes for 2020
Generally, Form 1099 MISC is used to report miscellaneous expenses made in a calendar year to the IRS. Miscellaneous income includes rent, royalties, prizes or rewards, etc. Previously, non-employee compensation was also included in miscellaneous income. Non-employee compensation was reported on 1099 MISC box 7 from the past few years. But beginning with the tax year 2020, 1099 MISC box 7 used to report direct sales. In the prior year, these payments were included in box 9 of the form. From 2020, if the payer made direct sales of $5,000 consumer products to a buyer, then report it on “1099 MISC Box 7”.
IRS Form 1099 NEC replaces 1099 MISC box 7
As per the IRS norms, business owners who pay contractors for performing services used 1099 MISC box 7 to report the payments. But from 2020, use the new Form 1099 NEC to report the payments made other than salary. Yes, 1099 NEC form has made changes in reporting mechanism as well as the date to submit the tax returns.
Form 1099 NEC Tax Forms are due to the IRS and to the recipient on the same day i.e., January 31st. So, previously who used Form 1099 MISC box 7 must now report on the new 1099 NEC. Furthermore, the payer must start gathering the necessary information to file 1099 NEC Tax Form by ending the month of January. Those who pay independent contractors as rent, royalties can use “1099 MISC Tax return” to report the miscellaneous income.
Why were the changes made on 1099 MISC box 7?
The primary reason for the change is to control the activity of filing fraudulent 1099 Forms to the IRS. Few of the business owners are falsely reporting NEC in small amounts and withholding taxes in large amounts. On the other hand, due to differences in deadlines, the tax returns are submitted prior to the deadline. Therefore, there is no sufficient time for the IRS to match recipient statements with payer copies.
Due to this, there is a rapid increase in scammer activities. To control the fraudulent scams, the PATH Act passed a rule in 2015. The rule states that “taxpayers who are reporting an amount in box 7 of 1099 MISC must file the form by January 31st every year”. hence, the deadline was changed from “February 28th” to “January 31st”. After the changes made by PATH Act, the IRS has brought back old Form 1099 NEC in the 2020 tax year.
Does the change create more work for the 1099 payers and payees?
Yes, the change has made severe work to the payers and payees. They are discussed below:
For the payer
- Previously, payers used a single form to report miscellaneous income and non-employee compensation. But from 2020, they need to issue two separate forms to report NEC and miscellaneous income. For instance, if the payer hires an individual &pays him miscellaneous income and NEC. Then you need to issue both 1099 NEC and 1099 MISC. This means you are sending multi-tax statements to a single payee.
- Due to the new 1099 NEC Form, payers face difficulties when filing with the state. Because all the states do not participate in CF/SF program. So, if the income paid to the payee meets the state tax withholding requirements, then you need to file separately with the state.
For the payee
The payees receive multiple 1099 Tax Form from a single or multiple payers. Besides, all the tax returns will not be sent to a payee at the same time. Due to which it becomes difficult for a payee to keep a track of records when filing income tax returns. On the other hand, it will become a tough task for a payee to determine cumulative taxable income to the payee.
What is the impact of changes in 1099 MISC box 7?
The change in 1099 MISC box 7 has a greater impact on the payee as well as on the payer. So, all the business owners must keep in mind when reporting the payments to the IRS. For 1099 NEC, you must report the income paid to an individual for performing serves as a non-employee. Report the miscellaneous income paid to an independent contractor for services performed on a course of business. Finally, make sure that 1099 NEC and 1099 MISC must report to the IRS on two different dates.
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