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Preparing Your 1099 and W-2: Updates You Need to Know

It’s that time of the year where we turn our focus to year-end planning. If you’re beginning your 1099 preparations or reviewing whether you have properly included fringe benefits on your employee W-2 forms, we have some important updates to share with you.

For filing 1099 NEC:

  • The IRS is introducing a new form, 1099 NEC (Non-Employee Compensation) form, which should be used for recording payments of $600 or more made to unincorporated entities for services rendered in 2020.
  • The 1099 NEC for 2020 is due February 1, 2021.
  • The 1099 NEC is used to report amounts previously reported on the 1099 MISC Box 7.
  • A W-9 is included with this message.  It is a best practice to collect a W-9 from each new vendor before the first payment. This form allows you to determine whether a 1099 would be required.

For filing 1099 MISC:

  • The 1099 MISC should be used for any payments made for rent or medical payments during 2020.
  • 1099 MISC for 2020 is due February 1, 2021.
  • Rent paid to any entity (including related parties) is required to be reported on the 1099 MISC in the rent box (Box 1).
  • It is a best practice to collect a W-9 from each new vendor before the first payment. This form allows you to determine whether a 1099 would be required.
  • The IRS has been getting aggressive in this area. The risk of not sending a 1099 is having a deduction reversed on a prior-year tax return (which could mean additional tax with penalties/interest). When in doubt, filing a 1099 is a best practice.

For Filing 1099 INT:

  • Most payments of interest to an unincorporated entity or related party are required to be reported on a 1099 INT.
  • 1099 INT for 2020 is due February 1, 2021.

W-2 Fringes:

  • The most common W-2 fringes we see are personal use of company auto, health insurance for a 2% s corporation shareholder, Group term life insurance with a benefit above $50,000 for any employee and additional compensation.
  • W-2s are due February 1, 2021.
  • Health Insurance paid on behalf of an S corporation shareholder (who owns more than 2%) is required to be added to the W-2 of the shareholder in order to be able to deduct this on their personal return.
  • Payments of premiums or any amounts on behalf of any employee (when the entire group is not included) is considered additional compensation.
  • A discriminatory payment to or on behalf of an employee or related party may be considered “additional compensation” and will require a W-2 adjustment.
  • Giving an employee a 1099 for fringes is not usually appropriate. A 1099 does not collect withholding or the FICA/Medicare that is required for such payments. It can also be a red flag of sorts. 1099s are for independent contractors and W-2s are for employees. The IRS and Maryland have gotten aggressive in this area and could have Affordable Care Act consequences, as well.

We will continue to update this insight with any new guidance as it becomes available. Please be sure to consult with your accountant or financial advisor to discuss what’s best for your particular situation.

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