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Consultant’s Corner: Tax Reporting Changes for Employers Engaging Independent Contractors

Q: Is it true that tax reporting is going to change for businesses that engage independent contractors?

Under current tax law, businesses report cash and check payments for services rendered by non-corporate vendors, such as qualified independent contractors, on Form 1099-MISC, which is filed annually and, in the case of services, only when payments total $600 or more during the calendar year. Businesses are required to provide non-corporate vendors and the IRS with copies of Form 1099-MISC for the preceding calendar year by January 31st. Copies of Forms 1099-MISC must also be submitted to certain state taxing authorities for the preceding calendar year by February 28th (some states have adopted the IRS’ January 31st due date); however, most states obtain their 1099 information through data sharing arrangements with the IRS. Forms 1099-MISC submitted to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Forms 1099-MISC and 1096 must be submitted to the IRS electronically or using machine readable (optically scanned) forms that you can order directly from the IRS at 1-800-TAX-FORM (1-800-829-3676). You can find and review Forms 1099-MISC, 1096 and the filing instructions at the following IRS websites:

2019 tax year forms (for reporting amounts paid in calendar year 2019):

2019 Form 1099-MISC (IRS)

2019 Instructions for Form 2099-MISC (IRS)

2019 Form 1096 (IRS)

Form 1099-MISC has been redesigned for the 2020 calendar year. Beginning with the 2020 calendar year, nonemployee compensation or amounts paid to nonemployee vendors, such as workers engaged as qualified independent contractors, for services rendered will no longer be reported on Form 1099-MISC. Instead, nonemployee compensation paid in 2020 and subsequent calendar years will be reported on revived Form 1099-NEC, Nonemployee Compensation. Reportable nonemployee compensation employers pay during the 2020 calendar year should be reported on the 2020 Form 1099-NEC, which employers will file in January 2021. Additional information on 2020 Form 1099-NEC can be found at the industry websites below:

Form 1099-NEC Revived for Separate Reporting of Nonemployee Compensation (Wolters Kluwer)

IRS to Reinstate Form 1099-NEC (American Payroll Association)

The 2020 Forms 1099-MISC and 1099-NEC and their instructions can be found at the links below:

About Form 1099-MISC (IRS)

About Form 1099-NEC (IRS)

It is important to note that businesses only report cash or check payments on Form 1099-MISC and Form 1099-NEC beginning in 2020. Payments made by credit or debit cards as well as those made through third-party networks such as PayPal, Amazon.com and Google are reported by the payment processors on Form 1099-K. The following is IRS and related information on the topic:

Third Party Reporting Information Center (IRS) (Note the Form 1099-K and instructions found through this link are for amounts paid in the 2020 calendar year)

Merchant Card Reporting Compliance Raises Its Head Again (AICPA)

However, the regulations contain an “aggregate payee” rule that requires companies who accept credit or debit card payments and third party network payments for other parties who work for them as independent contractors to report those payments on Form 1099-K. You can review Form 1099-K and its instructions at the following websites:

2019 tax year forms (for reporting amounts paid in calendar year 2019):

2019 Form 1099-K (IRS)

2019 Instructions for Form 1099-K (IRS)

2020 tax year forms (for reporting amounts paid in calendar year 2020):

About Form 1099-K (IRS)

Taylor Hughes

About Taylor Hughes

Taylor Hughes is a Small Business Consultant with GoSmallBiz.com and holds a Bachelor’s degree in Business Administration and Management from the University of Alabama. He has been part of the GoSmallBiz.com team since 2017. Taylor helped launch an outdoor recreation company near Yellowstone National Park, and has worked in logistics with John Deere.