The Internal Revenue Service developed a brand new, 2020, Form 1099-NEC, which is to be used to report payments for services of $600 or more during 2020 to independent contractors and freelancers. In the past, payments to independent contractors were reported on Form 1099-MISC along with other types of income (prizes, awards, etc). Copy A of the brand new 1099-NEC form is due to the IRS by February 1, 2021 for year 2020, with the “B” copies deadline to the actual contractor-recipients also being February 1, 2021.
Organizations which pay people “off the payroll” should make sure they have W-9 forms on file from their contractors/freelancers, since the W-9 form has the “taxpayer identification number,” name, address, etc. of the contractor, which is needed for accurate reporting on the new 1099-NEC form. You are not required by the IRS to report payments to “corporations” except for payments to law firms which are incorporated. Payments reported to limited liability companies should have the LLC employer identification number on it, with payments to individuals/sole proprietors having social security numbers reported on them——–Review your records for people you have paid “off the payroll” during 2020 so that you have the needed information for filing of their 1099-NEC forms by February 1, 2021.
We encourage organizations to review their policies as to how they classify their workers as “employees or independent contractors/1099’s.” If you are audited and the IRS reclassifies workers from 1099 to payroll/employee status, the financial ramifications of such as worker reclassification can be severe—–back taxes, back overtime pay, back employee fringe benefits and possible “large employer” status pursuant to the Affordable Care Act. The US Department of Labor issued a proposed rule on September 22, 2020 which is pending public review and comments. The “gist” of the new DOL proposed rule on worker classification is to change the previous “20 factor test” and the most recent “3 behavior test” to what they refer to as an “economic reality test”—–does the worker being paid have potential to increase their compensation/profit by motivation/innovation, can they incur a “loss” on the work, have they invested money/capital to fulfil the work they do? PLEASE READ the document from the DOL pertaining to factors you should consider in determining whether a workers is an employee or independent contractor. We also found an excellent article online from a law firm which is a nice summary of the new DOL “economic reality test” classification system—you can read it here.
We authored a previous PayDay, from March of 2020, titled “Paying Employees as 1099’s—-Huge Risk!”——-please read this article about worker classification risks here.
Correctly classifying your workers as “employees or contractors” is very important. You can not eliminate your risk of employee status by simply entering into a written “contractor agreement” with the worker which declares they are an independent contractor—–the substance/economic reality of the worker relationship will control the ultimate classification as an employee or contractor. For those workers whom you do classify as 1099/contractors, make sure you send them, and the IRS, the new 1099-NEC form!