The IRS has announced that the 1099-NEC form will be required for the 2020 tax year to report certain nonemployee compensation. According to the IRS, your business must file Form 1099-NEC, Nonemployee compensation (NEC), for each person in the course of your business to whom you have paid the following during the year at least $600 in:
- Services performed by someone who is not your employee (including parts and materials) (box 1);
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish (box 1); or
- Payments to an attorney (box 1). (See Payments to attorneys, later.)
You must also file Form 1099-NEC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.
- Payments to attorneys. The term “attorney” includes a law firm or other provider of legal services. Attorneys’ fees of $600 or more paid in the course of your trade or business are reportable in box 1 of Form 1099-NEC, under section 6041A(a)(1).
- Gross proceeds paid to attorneys. Gross proceeds are not reportable by you in box 1 of Form 1099-NEC. See the Form 1099-MISC box 10 instructions.
- Payments to corporations for legal services. The exemption from reporting payments made to corporations does not apply to payments for legal services. Therefore, you must report attorneys’ fees (in box 1 of Form 1099-NEC) or gross proceeds (in box 10 of Form 1099-MISC) as described earlier to corporations that provide legal services.
Please visit the IRS website to ensure you have full knowledge of these changes.
Now that reports of nonemployee compensation is its own separate form, the 1099-MISC form has had some revisions done. Here’s what you can expect:
- Section 409A deferrals are in Box 12.
- Section 409A income has been removed
- Gross proceeds paid to an attorney are in Box 10
- NQDC – for those who do not meet the requirements of IRS Section 409A can be located in Box 14.
- State Tax reporting will be located in Boxes 15-17.
- Crop insurance proceeds are in Box 9.
- Payer made direct sales of $5000 or more of consumer productions to a buy for resale in in Box 7.
HOW WILL These 1099 Changes AFFECT DYNAMICS GP?
If you are using GP to fill out 1099s, the changes made by the IRS will affect you if you are not on GP 2016 or GP 18.2.
Microsoft will NOT be releasing the year-end update for version 2015 or older or for version 2018 R2. If you are running these versions and need assistance with 1099 forms, please connect with your Client Account Manager as soon as possible to discuss options.
As for GP 2016 and GP 18.2, Microsoft will be releasing a year-end update to provide for the 1099-MISC and 1099-NEC changes. This 2020 year-end update will be the last Microsoft year-end update for 1099 and W-2 reporting for GP 2016. For future W-2 and 1099 changes, Microsoft will be releasing year-end updates only for GP 18.2.
What if I can’t upgrade Dynamics GP?
If you are not on GP 2016 or 18.2 and cannot upgrade at this time to receive the year-end update, you do have some options.
If you are unable to upgrade GP at this time due to budgetary or timing issues, you may want to start looking at using a third-party vendor for 1099 processing. Your Client Account Manager (CAM) may have some recommended third-party vendors to work with. Please make sure you are in communication with your CAM to ensure you have a plan in place.
Companies with few 1099s to file may choose to manually process their 1099 forms. If upgrading GP or using a third-party vendor will not work for your company, you may want to consider manually processing your 1099s with printable forms.
Please reach out to your Sikich Client Account Manager for more information or if you have any questions. It is important you understand these updates and have a plan in place for your company.