The next big payroll change: Information reporting for independent contractors

So you thought the IRS was finished tinkering with your payroll processes with the release of the first draft of the 2020 W-4 and Pub. 15-T? Nope. The IRS has another payroll change – it wants to resurrect an old tax form—Form 1099-NEC—on which you would report payments to independent contractors.

The first time this new form would be filed would be in 2021, for payments to independent contractors next year. And that’s not a lot of time.

Yesterday

The last time the IRS used Form 1099-NEC was for the 1982 tax year.

Today

Cash payments of at least $600 to noncorporate independent contractors are reported to them and the IRS on Form 1099-MISC in Box 7. Form 1099-MISC is also used to report certain nonwage payments to employees, like damages arising from a lawsuit and to report gross proceeds to any attorney.

The problem: The Protecting Americans from Tax Hikes Act of 2015, or PATH Act, split the filing deadlines:

  • For Forms 1099-MISC with Box 7 entries, the filing deadline is Jan. 31, regardless of whether you file on paper or electronically.
  • For Forms 1099-MISC with entries in any other box, the filing deadlines remain Feb. 28 (paper filers) or March 31 (e-filers).

This split deadline has caused employers endless headaches, since the forms now need to be separated, depending on the boxes that are completed. And the IRS is serious about those filing deadlines. If you mistakenly slip in even one Form 1099-MISC with an entry in Box 7 with other forms and file all of them after January 31, the IRS will assess a late filing penalty on all the forms, even though only one was filed late.

Tomorrow

Here’s a shot of the first draft of the new Form 1099-NEC.

The IRS originally said the boxes on Form 1099-NEC would be configured to mirror Form 1099-MISC. That doesn’t appear to be the case, at least for this first draft.

Snag #1: Complementary changes will need to be made to the current 1099-MISC. A completely redesigned 1099-MISC could cause reprogramming headaches for employers, which will still need to complete Forms 1099-MISC to report damages to employees, distributions to estates of deceased employees and gross proceeds to attorneys. A possible solution would be to leave all the box numbers the same and just gray out Box 7.

Snag #2: Lots of states participate in an information sharing program with the IRS, so you don’t have to file your 1099s with those states. But some states may not be prepared to deal with a new 1099.

Upshot: You may still need to file a 1099-MISC for your independent contractors for states not participating in information sharing, or for states that drop out of the information sharing program.

Communication is key

Of course, you have less interaction with independent contractors than you do with your employees. Nevertheless, it would be prudent to start thinking about how you’re going to communicate these changes to your contingent workforce, because they’re going to have questions when they get an entirely new form in the mail.

Care to comment

The IRS is taking comments on new Form 1099-NEC through the end of September.

Direct your written comments to: Laurie Brimmer, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, D.C. 20224.