SIGNIFICANT TAX NEWS CHANGE ABOUT NON-EMPLOYEE COMPENATION:
The IRS revived the use of Form 1099-NEC for use in reporting non-employee compensation for 2020. This form was last used in 1982 but now will be used to report 2020 non-employee compensation. Corresponding changes were made to the old 1099-MISC form. The due dates are also changed. The IRS will not share non-employee compensation data with states. The new form is used for individuals, partnership, estate, or corporations. Should include payments for services and payments for parts or materials used to perform the services. It is required when the payments total more than $600 for the year.
What does it mean for small businesses? It means that we need to be more clear in thinking through the tax impact of the contracts we devise and later report. Those who maintain inadequate records risk eventually over-paying income taxes and penalties. Errors and underreported gross income will be easy for IRS to identify and target with automated additional tax assessment.
While the change has received little media attention so far, I advise discussion and use of caution in small business expense payments that include payments for labor of people who are not your employees. More discussion is likely as the accounting profession adjusts to the change. The starting point for most small businesses and their accountants will be to review the form instructions and any related regulations when they are eventually published.
In summary, I think this will prove to be a bigger deal in changing the small business tax landscape than most people recognize at this time.