{"id":603,"date":"2020-12-22T06:43:29","date_gmt":"2020-12-22T06:43:29","guid":{"rendered":"https:\/\/blog.tax1099.com\/?p=603"},"modified":"2025-09-19T09:49:33","modified_gmt":"2025-09-19T09:49:33","slug":"why-did-the-irs-restore-form-1099-nec-for-tax-year-2020-2021","status":"publish","type":"post","link":"https:\/\/www.tax1099.com\/blog\/why-did-the-irs-restore-form-1099-nec-for-tax-year-2020-2021\/","title":{"rendered":"Why Did The IRS Restore Form 1099-NEC For Tax Year 2020-2021?"},"content":{"rendered":"\r\n

The simple change to Form 1099-MISC is the fiscal age definition of the butterfly effect<\/em><\/strong>.<\/p>\r\n\r\n\r\n\r\n

It\u2019s as if everything from the \u201870s is making a comeback in 2020. This sentiment holds especially true to business taxpayers in 2020 with the resurrection of Form 1099-NEC.<\/p>\r\n\r\n\r\n\r\n

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.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n

What Is Form 1099-NEC?<\/h2>\r\n\r\n\r\n\r\n

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\u2019s relatively an old form that dates back to 1979.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n

How Form 1099-NEC Leaves No Room for Manipulation<\/h3>\r\n\r\n\r\n\r\n

Form 1099-NEC<\/a> is being reintroduced to address three interrelated issues <\/em>with the current tax scenario. \u00a0(Stress on \u2018interrelated\u2019).<\/p>\r\n\r\n\r\n\r\n

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  1. \u00a0 \u00a0 Misclassification of employees<\/li>\r\n
  2. \u00a0 \u00a0 Manipulation of taxes<\/li>\r\n
  3. \u00a0 \u00a0 Issues with due dates<\/li>\r\n<\/ol>\r\n\r\n\r\n\r\n

    Misclassification of Employees<\/h3>\r\n\r\n\r\n\r\n

    Most businesses previously used Form 1099-MISC<\/a> 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?<\/p>\r\n\r\n\r\n\r\n

    You see, companies do not have to pay health insurance, unemployment pay, wages, workers\u2019 compensation, Medicare, and other benefits to independent contractors because independent contractors are not employees of the company.<\/p>\r\n\r\n\r\n\r\n

    See the definition of an \u2018independent contractor\u2019 according to the IRS.<\/p>\r\n\r\n\r\n\r\n

    So, the \u2018real\u2019 employees of the company who are being misclassified as independent contractors are being denied certain rights, employment\/worker safety, and employee perks.<\/p>\r\n\r\n\r\n\r\n

    Manipulation of Taxes<\/h3>\r\n\r\n\r\n\r\n

    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?)<\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    Seems like we\u2019re going in circles, doesn\u2019t it? Not quite.<\/p>\r\n\r\n\r\n\r\n

    Here\u2019s the catch.<\/p>\r\n\r\n\r\n\r\n

    Issues with Due Dates<\/h3>\r\n\r\n\r\n\r\n

    Before the update to 1099 forms for the tax year 2020-2021, the instructions according to the PATH Act<\/a>, specify that 1099-MISC had two due dates\u2013 one for paper filing (the end of February) and the other for e-filing (the end of March) for the tax year.<\/p>\r\n\r\n\r\n\r\n

    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<\/a>.<\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    These prescribed dates to file 1099-MISC forms<\/a> do not align with another important tax form, Form W-2<\/a>, which is used to report \u2018employee compensations\u2019. This form is supposed to be filed by the end of January of the tax year.<\/p>\r\n\r\n\r\n\r\n

    Do you see the problem here?<\/p>\r\n\r\n\r\n\r\n

    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.<\/p>\r\n\r\n\r\n\r\n

    The 2-month wide gap is making room for all kinds of misappropriations.<\/p>\r\n\r\n\r\n\r\n