The simple change to Form 1099-MISC is the fiscal age definition of the butterfly effect.
It’s as if everything from the ‘70s is making a comeback in 2020. This sentiment holds especially true to business taxpayers in 2020 with the resurrection of Form 1099-NEC.
Business taxpayers are scrambling to adjust to the new reforms laid by the IRS for the tax year 2020-2021, the latest being Form 1099-NEC, a business tax form that exclusively deals with the compensations made to nonemployees, better known as independent contractors.
Contents of the Blog
- What Is Form 1099-NEC?
- How Form 1099-NEC Is Leaving No Room For Manipulation
- Why Is Form 1099-NEC Being Resurrected?
- How Does Form 1099-NEC Affect Business Taxpayers?
What Is Form 1099-NEC?
Form 1099-NEC must be used by businesses to report any nonemployee payments made to independent contractors or vendors or freelancers. In short, it is primarily replacing Box 7 of Form 1099-MISC. Contrary to popular belief, 1099-NEC is not exactly a new form. It’s relatively an old form that dates back to 1979.
How Form 1099-NEC Leaves No Room for Manipulation
Form 1099-NEC is being reintroduced to address three interrelated issues with the current tax scenario. (Stress on ‘interrelated’).
- Misclassification of employees
- Manipulation of taxes
- Issues with due dates
Misclassification of Employees
Most businesses previously used Form 1099-MISC to report any miscellaneous payments made to independent contractors. However, some businesses from transport, healthcare, and other industries are using this as a loophole to misclassify their employees as independent contractors. Why?
You see, companies do not have to pay health insurance, unemployment pay, wages, workers’ compensation, Medicare, and other benefits to independent contractors because independent contractors are not employees of the company.
See the definition of an ‘independent contractor’ according to the IRS.
So, the ‘real’ employees of the company who are being misclassified as independent contractors are being denied certain rights, employment/worker safety, and employee perks.
Manipulation of Taxes
The IRS wants businesses to have more employees than independent contractors because the higher the number of employees, the more pressure on businesses to be transparent with the IRS about their incomes and payments. (If you can afford to have employees, you can afford to pay taxes, right?)
However, some businesses, in a run to cut down on employee costs, depend on independent contractors, and of course, those compensations have to be reported to the IRS in forms 1099-MISC.
Seems like we’re going in circles, doesn’t it? Not quite.
Here’s the catch.
Issues with Due Dates
Before the update to 1099 forms for the tax year 2020-2021, the instructions according to the PATH Act, specify that 1099-MISC had two due dates– one for paper filing (the end of February) and the other for e-filing (the end of March) for the tax year.
Another important point, which should not be missed, is that if a business has more than 250 1099-MISC forms, they have to e-file them through the FIRE (Filing Information Returns Electronically) program.
With the global pandemic Covid-19 coming to an all-time high in 2019-2020, and with the current safety concerns, businesses are opting to e-file.
These prescribed dates to file 1099-MISC forms do not align with another important tax form, Form W-2, which is used to report ‘employee compensations’. This form is supposed to be filed by the end of January of the tax year.
Do you see the problem here?
The employee compensation forms are being filed early, being taxed on, and returned even before the non-employee compensation forms are being submitted to the IRS. This also adds confusion about due dates for businesses that operate in good faith. Additionally, some businesses are claiming false credit on earned income tax.
The 2-month wide gap is making room for all kinds of misappropriations.
- Tax manipulation
- Misclassification of employees
- Duplication of filings
- Inaccurate compensation reports
- Confusion about due dates
Why Is Form 1099-NEC Being Resurrected?
The IRS decided to put an end to all the afore-mentioned chaos by bringing back the long-forgotten hero – Form 1099-NEC. The form would leave no room for manipulation and make things more transparent in terms of business taxpayers reporting accurate incomes and payments.
Primarily, it would help protect thousands of American employees from being misclassified as independent contractors and give them the benefits and perks that they rightfully deserve as employees of a company.
It would also make the overall process of information filing relatively easy.
How Does Form 1099-NEC Affect Business Tax Payers?
Business taxpayers, starting with the tax year 2020-2021, have to use the new, additional form 1099-NEC when reporting to the IRS.
The 1099-NEC is a replacement of Box 7 of the 1099-MISC, which means that if a business made payments or compensations to an independent contractor, amounting to $600 or more, then such an amount must be reported in the ‘new’ Form 1099-NEC.
Business taxpayers have to use only one form for each independent contractor for the tax year in which they made these payments.
See what constitutes non-employee compensation here.
Look at the instructions to file Form 1099 MISC and 1099-NEC for the tax year 2020-2021 here.
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2020 has brought back so many trends. It’s the ultimate year of all throwbacks. So, maybe the reintroduction of the form 1099-NEC is not so bad. Maybe, it’s one of the few good things that we are getting to witness.
It’s safe to say that this simple change to Form 1099-MISC is the fiscal age definition of the butterfly effect.