The IRS has resurrected the 1099-NEC form, making big changes to Form 1099-MISC. The new 1099-NEC form will be used for reporting non-employee compensation (NEC) payments beginning with the 2020 tax year, and payments that previously belonged in Box 7 of Form 1099-MISC, Miscellaneous Income, will now be shown on Line 1 of Form 1099-NEC.
This may appear to be a major change at first sight, but ultimately, the tax implications are the same. This blog post will look into the changes made on IRS Form 1099-MISC, and what you need to know about the new Form 1099-NEC.
Let's get started.
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Form 1099-MISC helps in reporting miscellaneous income such as:
Previously, box 7 on the 1099-MISC was utilized to record non-employee compensation. It helped in reporting all types of compensation that independent contractors received -- from awards, commissions, to fees.
Independent contractors who provided services but were not considered employees of the payer received a Form 1099-MISC rather than a W-2 form. But that has since changed. Such information now belongs on Form 1099-NEC.
So, for freelancers who typically receive 1099-MISC forms with information in box 7, they'll now get the 1099-NEC instead.
Box 7 on 1099-MISC now helps in recording direct sales of $5000 or more. These sales need to be of consumer goods to a client on a buy-sell, deposit-commission, or other commission bases for resale outside of a permanent retail location.
This mostly applies to multi-level marketing companies. Multi-level marketing (MLM) firms generally sell products to their sellers at a wholesale rate and may give incentives, commissions, or rewards to the sellers.
These companies will now have to mark the checkbox on box 7 with an X -- the part written: "payer made direct sales". They'll also need to provide a Form 1099-NEC to their sellers.
Note that the due date for 1099-NEC is Feb. 1 to both the IRS and recipients. For IRS e-filing, the new 1099-MISC due date was pushed back to March 31, because it no longer includes Box 7.
If you've entered an incorrect Box 7 amount on a Form 1099-MISC that was filed earlier than 2019, you don't have to worry. According to the IRS, changes to 1099-MISC box 7 for tax years 2019 and prior will remain on the old 1099-MISC form.
The IRS has revived Form 1099-NEC, which was retired back in 1982, to address the confusion caused by the PATH act. The PATH (Protecting Americans from Tax Hikes) Act of 2015 was confusing to many small-business owners and tax professionals as it created different due dates for the various types of income reported on the 1099-MISC. As a result, taxpayers often received undeserved penalty charges.
Prior to the 2015 PATH Act, taxpayers had until February 28 of each year to submit one Form 1099-MISC for non-employee compensation and other payments. The due date for submitting a Form 1099-MISC was changed by the PATH Act from February 28 to January 31 for reporting non-employee compensation.
On top of the confusion, this change also resulted in the IRS mistakenly considering forms received after January 31 as late returns.
The change also helped the IRS to combat fraud. Taxpayers were claiming small amounts of non-employee compensation but hefty amounts of withholding. The IRS found it very difficult to verify recipient statements with the payer copies of Form 1099-MISC.
The form is used to report the non-employee compensation (NEC) paid by a business. This includes things like fees, commissions, or reimbursements for expenses that you don't need to pay tax on because of your profession.
For example, if you're an attorney and your law firm pays you $1,000 as reimbursement for an expense you incurred as part of your job, that amount is reported on Form 1099-NEC. Earned income such as wages and tips are not reported on this form; those go on Form W-2.
You need to file the 1099-NEC form if you're a business that paid someone over $600 via non-employee compensation during the year. This includes independent contractors, lawyers, accountants, etc.; basically, anyone who provides services for your company but is not an employee.
Because of the introduction of Form 1099-NEC, Form 1099-MISC has been revised, with box numbers rearranged as follows:
The IRS has integrated Form 1099-NEC into its Combined Federal State Filing (CF/SF) program, which was announced with the release of Publication 1220 for the tax year 2021.
This program is designed to alleviate the stress of filing 1099s directly with states since the IRS transmits federal 1099s to participating state agencies. At present, 36 states and the District of Columbia are still working under their own direct reporting requirements for the 1099-NEC that are not met by the combined federal/state filing.
That said, It's important to double-check your state's rules if you're submitting Form 1099-NEC. If the state filing requirements are not followed, most states may impose punitive fines and interest.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?